Unemployment - negative impact: a country with lower unemployment tends to have
more flexible labour markets making it less vulnerable to changes in the economic
environment. In addition, lower unemployment reduces the fiscal burden of
unemployment and social benefits while broadening the base for labour taxation.
Government debt - negative impact: a higher stock of outstanding government debt
implies a higher interest burden and should correspond to a higher risk of default.
Fiscal balance - positive impact: large fiscal deficits absorb domestic savings and also
suggest macroeconomic disequilibria, negatively affecting the rating level. Persistent
deficits may signal problems with the institutional environment for policy makers.
Government effectiveness - positive impact: high quality of public service delivery and
competence of bureaucracy should impinge positively of the ability to service debt
obligations. (We initially used all six World Bank Governance Indicators: voice and
accountability, political stability, regulatory quality, rule of law, control of corruption
and government effectiveness, but only this last one turned up as significant).
External debt - negative impact: the higher the overall economy’s external
indebtedness, the higher becomes the risk for additional fiscal burdens, either directly
due to a sell-off of foreign government debt or indirectly due to the need to support
over-indebted domestic borrowers.
Foreign reserves - positive impact: higher (official) foreign reserves should shield the
government from having to default on its foreign currency obligations.
Current account balance - uncertain impact: a higher current account deficit could
signal an economy’s tendency to over-consume, undermining long-term sustainability.
Alternatively, it could reflect rapid accumulation of fixed investment, which should lead
to higher growth and improved sustainability over the medium term.
Default history - negative impact: past sovereign defaults may indicate a great
acceptance of reducing the outstanding debt burden via a default. The effect is modelled
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