Do Economic Growth, Human Development and Political Stability favour sovereign Creditworthiness of a Country? A Cross Country Survey on Developed and Developing Countries

Abstract

One of the challenges face a country or firm when deciding to lend a foreign country or firm is how to appraise the creditworthiness of that firm or country? It is experienced and commonly use of credit ratings established by Credit Rating Agencies (Moody’s, Standard and Poor’s and Pitch) as the yardstick for sovereign creditworthiness appraisal, these will be the secondary or an appeal instrument for appraising creditworthiness. This study established local based factors that will be used as pre-requites factors or benchmark for lending decisions of a country or a firm. The level of economic growth, human development and political instability of a country borrowing found to affect the ability of paying its debt obligations. The study used cross country survey strategy for generalization purpose. Twenty countries used from both developed and developing, ten countries from most risk and another ten countries from least risk countries. The multivariate multiple regressions model used to analyzed data with the aid Minitab 16.1 software. The findings of the study are that, GDP per capita, GDP growth, government budget, current account balance and inequality-adjusted index are negatively related to the probability of a country to dishonor its debt obligations. The unemployment rate, inflation rate and political instability index found to be positively support the probability of a country to dishonor its debt obligations. It is recommended that countries lending a foreign country or firm based on abroad should adhere to these pre-requisite factors for creditworthiness appraisal. These factors should be used as basic guidelines for assessing the probability of default of a country in lending decisions.
Keywords: Developing Countries, Economic Growth, Political Stability.