LocationsThe Credit Rating Effect On Development
Sovereign Credit Ratings affect development in three key ways. First, ratings affect risk perception and thus determine interest rates countries have to pay. A higher rating leads to lower interest rates. Second, lower-rated countries also receive less lending due to their high risk perception. And finally, while ratings are not strictly required for Foreign Direct Investment (FDI), they often serve as a signal to investors about the country’s perceived risk, and thus encourage or discourage FDI flows.
Development Costs of Credit Ratings Idiosyncrasies
Source: LOWERING THE COST OF BORROWING IN AFRICA - The Role of Sovereign Credit Ratings, 2023, UNDP Africa, FAO
The 2023 UNDP report on lowering the cost of borrowing in Africa found many idiosyncrasies (subjectivities) in global credit ratings of African countries. It estimated that these subjectivities cost African countries a total of $75 billion, including both excessive interest and foregone lending volume.