Non-Linear Determinants of Developing Countries' Sovereign Ratings: Evidence from a Panel Threshold Regression (PTR) Model

This paper investigates the non-linear effects produced by the main determinants of the sovereign ratings issued by Moody's agency. Using a sample of 29 countries observed over the 2000-2019 period, we identify the factors leading a country to be classified, respectively, in the speculative, moderately speculative, and highly speculative grades. The fixed effect logit estimates reveal that the effects produced by the independent variables on the ratings are largely different from one class of assets to another. The second and main contribution of this study is that it highlights the non-linear effects produced by macroeconomic variables on the probability of downgrading a country from the investment to the speculative grade and from the moderately speculative to the highly speculative grade. Panel threshold regression (PTR) results reveal that control of corruption, external debt, government effectiveness, and domestic credits are the main variables producing such non-linear effects.