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TWN
Info Service on Finance and Development
Penang, 15 June (Lean Ka-Min) – Assessments by credit rating agencies (CRAs) of sovereign creditworthiness do not merely reflect states’ capacity to service their debts, but can also shape the cost and availability of external borrowing itself, with implications for a country’s debt sustainability and access to finance. A new report jointly published by the NGOs Latindadd and Third World Network highlights the considerable influence wielded by just a handful of CRAs through their rating actions. Over 94% of outstanding credit ratings are controlled by the “Big Three” agencies – Moody’s, S&P and Fitch, all headquartered in the United States. The ratings issued by CRAs affect the yield, or interest rate, paid out by a bond or other debt instrument: as ratings decline, yields tend to rise. For sovereign borrowers, therefore, credit ratings shape their financing conditions and access to external funding. With their greater financing needs, developing countries are particularly vulnerable to the judgements issuing from the corporate offices of CRAs. Sovereign debt levels across the Global South reached a new high of $8.9 trillion in 2024, notes the report’s summary. More than half of this developing-country debt is subject to international market interest rates, which are influenced by CRA ratings. According to the report summary, developing regions have since 2020 been borrowing at rates two to four times higher than those for the US – contributing to the debt distress they face. For developing countries, adverse events ranging from economic crises to climate disasters and health emergencies can trigger credit rating downgrades, or warnings of downgrades, that result in higher interest rates. Emerging market and developing economies accounted for over 95% of sovereign downgrades in 2020, the report says. By raising borrowing costs and deterring new investment, such downgrades may exacerbate the very conditions they are said to measure. More broadly, downgrades can, says the report, “reinforce a hierarchical financial order in which peripheral states face cyclically higher borrowing costs, sharper capital outflows, and narrower fiscal policy space in times of crisis”. Concrete examples of the sway rating actions exert over the trajectory of developing economies are provided by the report through nine country case studies from across the Global South. How CRAs arrive at their all-important ratings is another major focus of the report. It says, “Risk ratings are neither innocuous nor neutral, being the fruit of judgements made by so-called experts working in the world financial centres but with explicit and serious consequences for the world’s periphery.” While CRA assessments are mostly based on quantitative economic indicators such as per capita GDP, GDP growth, inflation, the current account balance, the budget balance, external debt and foreign exchange reserves, “how these indicators are interpreted by rating committees in their consideration of economic resiliency, government financial strength and susceptibility to event risk can vary greatly in process and outcome”. In addition, qualitative criteria, including national governance, the rule of law, institutional efficiency and regulatory quality, are also employed in the rating process. Assessments of these criteria often rely on in-house appraisals from within the CRAs themselves, which may lack sufficient understanding of the national context in the countries concerned. The report flags concerns that ratings are subject to a “home bias” whereby CRAs tend to assign higher ratings to their home countries and to countries with similar economic, political, cultural and social characteristics. It cites the contention of two scholars that “[c]redit rating as a mental process and set of behaviors continues to be headquartered in the US…”. Specifically, “[c]redit ratings are skewed by income, not actual risk”, says the report. “Empirical analysis shows that GDP per capita, rather than solvency indicators, is the strongest predictor of sovereign credit ratings, and particularly so over short-term trajectories of five to 10 years.” According to a study cited in the report’s summary: “Approximately 74.6 per cent of developed countries have an investment-grade credit rating, compared with 9.2 per cent of developing countries. Disaggregated among the developing countries, only 18.5 per cent of upper-middle-income countries, 4 per cent of lower-middle-income countries, and 0 per cent of low-income countries have an investment-grade rating.” With income being the leading determinant of ratings, many high-income countries have been assigned triple-A ratings even with debt-to-GDP ratios exceeding 100%, notes the report. Conversely, developing countries may be weighted down by unfavourable ratings despite high development prospects. “This leads to procyclical investment patterns that funnel capital to already-rich countries and perpetuate underinvestment in high-potential regions,” the report says. Another plus point as far as CRAs are concerned is fiscal consolidation. The report points to the example of the COVID-19 period, when “spending what is needed on pandemic response could invite ratings downgrades”. Governments anxious not to jeopardise their credit ratings could therefore seek to cut public expenditure regardless of the impact on social well-being and long-term development. Given the shortcomings in the CRAs’ ratings methodology, it is little wonder that they have committed some high-profile blunders. The report notes how the agencies overlooked legitimate risks before the 1997–98 Asian financial crisis hit, and subsequently went on to aggravate the crisis by downgrading Asian governments beyond what the macroeconomic indicators justified. They had also consistently accorded positive ratings to the mortgage-backed securities that would play a big part in sparking the global financial crisis of 2007–08. In the wake of that crisis, the United Nations initiated intergovernmental dialogues on the role of CRAs, leading to a thematic debate at the UN headquarters in 2013. The debate, according to the report, “expressed concern about the market concentration of CRAs and called for improvements in their transparency and impartiality, as well as for sovereigns to reduce mechanistic reliance on ratings while also encouraging alternative risk assessment approaches”. In 2025, the UN’s fourth conference on Financing for Development underlined the need for “accurate, objective, and long-term-oriented credit ratings”, and urged countries to consider national regulatory frameworks “to reduce overreliance on credit ratings, increase transparency regarding the issuing of sovereign debt ratings, improve the quality of the rating process and make credit rating agencies more accountable for their actions, and reduce conflicts of interest and encourage a greater number of actors to operate in the credit rating market”. These calls reflect the three main strands of proposals advanced to address the prevailing deficiencies of CRAs. The first, as pointed out by the report, is to reform the agencies’ ratings methodology by, among other measures, adopting a longer-term outlook in assessments and decreasing the weight accorded to per capita GDP while also considering a country’s growth and development potential. Another line of thought advocates reducing reliance on CRAs. The third approach prioritises the creation of independent alternatives to the Big Three agencies. Such alternatives include the African Credit Rating Agency (AfCRA) and a Multilateral Credit Rating Agency (MCRA) – two initiatives which are outlined in the report. Established by African Union heads of state and government, the AfCRA is reportedly scheduled to begin operations in mid-2026, while the proposed MCRA is envisioned as an institution that comes under the UN umbrella. These bodies would aim to improve sovereign credit risk assessment by, for example, integrating into rating criteria considerations of development trajectories, debt sustainability and climate vulnerability rooted in a more nuanced understanding of national realities. Ultimately, says the report, “[i]mproving sovereign financing conditions in the Global South requires a transformation in the production of sovereign risk assessments”. Otherwise, developing countries will remain shackled to a ratings paradigm that “systematically overprices vulnerability and underestimates long-term development potential”. The full report, entitled “Dancing to Their Tune: Credit Rating Agencies, Sovereign Risk, and Financing Conditions in the Global South”, is available at https://latindadd.org/wp-content/uploads/woocommerce_uploads/2026/06/dancing-to-their-tune-amqttj.pdf
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