Description

The sovereign rating is a particularly useful indicator for both governments and financial markets, as it allows the assessment of countries' capacity and willingness to repay their public debt on time. At the beginning of 2017, there were doubts as to whether Chile had the right rating based on its fundamentals, since several of them had gradually deteriorated in recent years. The objective of this paper is to quantify the importance of these fundamentals and their potential effect on Chile's rating adjustment. To this end, we conducted an empirical analysis based on Moody's long-term foreign-currency sovereign ratings using a random-effects ordered probit model for a panel of 65 countries between 1997 and 2015. The results obtained suggest that the estimated rating for Chile could be between 1 and 2 notches below the effective level during the years 2014 and 2017, and in line with its fundamentals in the years 2018 and 2019. Additionally, the variables GDP per capita, international reserves, public debt, domestic investment, and government effectiveness are noted as the most robust within the analysis, suggesting that the future evolution of these should be monitored with special attention.