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Insights from the 2007 Paris Club Meeting: Understanding Sovereign Ratings and Economic Performance

This report analyzes sovereign ratings discussed during the Paris Club meeting in May 2007, emphasizing their significance in assessing a country's economic health. Key aspects include the internal rating system, reliance on quantitative data, structural pillars affecting ratings, and a forward-looking ranking model. It provides comparative snapshots of Bangladesh and Ghana's economic performance against emerging markets, highlighting deviations and risk assessments based on various scores. Ratings play a crucial role in understanding liquidity, solvency, and the economic stability of nations.

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Insights from the 2007 Paris Club Meeting: Understanding Sovereign Ratings and Economic Performance

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  1. Specific Issues Related to Sovereign Ratings Paris Club Meeting with Private Sector Paris, May 2007 Khalid Sheikh May 2007 MANGO May, 2007

  2. What is Sovereign rating about? • Internal system • Benchmarked against external ratings • Based on quantitative data and qualitative assessments • Pillars: Structural setting, government balance and government debt, private sector soundness, monetary stability, foreign debt, current account, international liquidity and political stability • Foreign and local currency rating (Fcy and Lcy) • Outlooks • Flags - short term risk signals MANGO May, 2007

  3. Sovereign rating • Ranking is primarily forward looking (three years horizon) and not mechanical. Anticipatory scores and qualitative assessments are allocated a weighting of around 65% • Short term developments play an important role as well: short term debt, reserves and the assessment of the liquidity situation count for around 20%. (reflected in flags, event risk analysis) • Rating agencies are used as reference • Focal points liquidity and solvability of a sovereign in relation to its willingness and ability to fulfil its payments obligations MANGO May, 2007

  4. Basics of Sovereign Rating System • Pillars • Data + scales = (sub)scores • Assessments • Weights • Final scores MANGO May, 2007

  5. Snapshot overview Bangladesh Economic performance vis-à-vis other Emerging Markets. Emerging Markets average is equal to 0 Graph shows deviation from average in number of standard deviations. Outward movements indicate risk deterioration MANGO May, 2007

  6. Bangladesh pillar scores Bangladesh Jamaica MANGO May, 2007

  7. Snapshot overview Ghana Economic performance vis-à-vis other Emerging Markets. Emerging Markets average is equal to 0 Graph shows deviation from average in number of standard deviations. Outward movements indicate risk deterioration MANGO May, 2007

  8. Ghana pillar scores Philippines Ghana MANGO May, 2007

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