Economic Governance Improvements and Sovereign Financing Costs in Developing Countries
Low- and middle-income country governments are increasingly tapping the global debt capital markets. This is increasing the amount of finance available for development, but at a considerably higher cost than traditional external borrowing on conces...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/565681620234717531/Economic-Governance-Improvements-and-Sovereign-Financing-Costs-in-Developing-Countries http://hdl.handle.net/10986/35547 |
| Summary: | Low- and middle-income country
governments are increasingly tapping the global debt capital
markets. This is increasing the amount of finance available
for development, but at a considerably higher cost than
traditional external borrowing on concessional terms. Using
a novel methodology based on estimating sovereign credit
ratings using the Moody’s scorecard, and examining the
associations between these ratings and the World Bank’s
Country Policy and Institutional Assessment scores, this
paper examines how making improvements in the quality of
economic policies and institutions can help lower
governments’ financing costs. This method aims to overcome
the small-sample problem due to the number of rated
developing country sovereigns still being relatively limited
(although growing). Better economic governance Country
Policy and Institutional Assessment scores are associated
with better estimated ratings and materially lower financing
costs; on average, improvements that are sufficient to
increase the Country Policy and Institutional Assessment
economic governance indicator score by one point are
associated with interest costs that are lower by about 40
basis points, even setting aside the direct impact on
ratings of better governance indicators. There are many
reasons why improving governance is a good thing. Among them
is the potential payoff to the public purse — savings of $40
million or more on a standard $1 billion, 10-year bond. |
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