Fiscal Transparency, Fiscal Performance and Credit Ratings
IMF Working Papers, June 1, 2012
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Bibliographic details
- Authors: Julio Escolano, Elif C Arbatli Saxegaard
- Published: June 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475504477.001
Overview
- Objective: Investigates the effect of fiscal transparency on market assessments of sovereign risk, as measured by credit ratings.
- Channels analyzed:
- Direct channel: uncertainty reduction.
- Indirect channel: better fiscal policies and outcomes.
- Country groups differentiated: advanced economies and developing economies.
- Fiscal transparency measure: an index based on the IMF’s Reports on the Observance of Standards and Codes (ROSCs).
Key findings
- Fiscal transparency has a positive and significant effect on credit ratings.
- Channel differences by country group:
- Advanced economies: the indirect effect of transparency through better fiscal outcomes is more significant.
- Developing economies: the direct uncertainty-reducing effect of transparency is more relevant.
- Magnitude: a one standard deviation improvement in the fiscal transparency index is associated with an increase in credit ratings by:
- 0.7 notches in advanced economies.
- 1 notches in developing economies.
Methodology (as described)
- Exposure of interest: fiscal transparency index derived from ROSCs.
- Outcome: sovereign credit ratings (market assessments of sovereign risk).
- Analytical strategy: decomposes transparency’s impact into direct uncertainty-reduction and indirect effects operating through fiscal policies and outcomes; differentiates results for advanced versus developing economies.
Policy implications and interpretation
- Improving fiscal transparency can enhance sovereign creditworthiness via two mechanisms:
- Strengthening fiscal outcomes (particularly influential in advanced economies).
- Reducing uncertainty perceived by markets (particularly influential in developing economies).
- Reforms to boost ROSC-based transparency indicators could yield measurable improvements in sovereign ratings, with potentially different priorities depending on country income/development status.