Understanding the sovereign credit ratings of emerging markets Orhan Erdem 1 , Yusuf Varli ⁎ Borsa İstanbul, Research Department, Turkey article info abstract Article history: Received 16 November 2013 Received in revised form 28 May 2014 Accepted 30 May 2014 Available online 8 June 2014 This paper identifies the macroeconomic factors behind the sovereign credit ratings of global emerging markets assigned by Standard and Poor's (S&P). The financial integration and globalization of capital markets have facilitated the capital inflows/outflows among coun- tries. Sovereign credit ratings have served as a signal for countries' economic, financial and political situations. Ratings are very impor- tant in the sense that they attract capital inflow and investments. This is especially vital for emerging markets. Although the rating agencies do not explicitly reveal their methodologies, it is possible to guess the effects of several variables on ratings by using various econometric models. Concerning the heavy criticisms on rating agencies' per- formances, we wish to examine the sovereign credit ratings within a specific country-category. In this essay, we study the effects of macroeconomic factors on the sovereign ratings of emerging markets. Using several approaches, we find that the most relevant factors are Budget Balance/GDP, GDP per capita, Governance Indicators and Reserves/GDP. Moreover, our model predicts up to 93% of all credit rating levels. Interestingly, we obtain that S&P's evaluation of the sovereign credit rating for Turkey performs poorly, especially in the highest rating levels. © 2014 Elsevier B.V. All rights reserved. JEL classification: C23 C25 E44 F34 H63 Keywords: Sovereign credit ratings Standard and poor's Macroeconomic indicators Panel data Ordered response models Emerging markets 1. Introduction Sovereign credit rating is an assessment allocated by rating agencies regarding financial and economic obligations of a specific country. It plays an important role in determining countries' access to international Emerging Markets Review 20 (2014) 42–57 ⁎ Corresponding author. Tel.: +90 212 298 2123; fax: +90 212 298 2500. E-mail addresses: Orhan.Erdem@borsaistanbul.com (O. Erdem), yusuf.varli@borsaistanbul.com (Y. Varli). 1 Tel.: +90 212 298 2220; fax: +90 212 298 2500. http://dx.doi.org/10.1016/j.ememar.2014.05.004 1566-0141/© 2014 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Emerging Markets Review journal homepage: www.elsevier.com/locate/emr