Sovereign Ratings and Oil-Exporting Countries: The Effect of High Oil Prices on Ratings

We investigate how high and rising oil prices in the 2003-2008 period affected the sovereign ratings of oil-exporting countries, after controlling for fundamentals. Based on a large dataset of countries from Standard and Poor's and Moody's, we find strong statistical evidence of a large ratings premium - nearly two notches - for those oil-exporting countries with a large share of net oil revenue to gross domestic product, relative to countries with similar economic fundamentals. We have some limited forecast information from the rating agencies and the effect increases when we include this information, providing further evidence that this ratings premium is not driven by expected improvements in fundamentals. This finding has implications for asset prices in oil-exporting countries and highlights the risk that in the event of a sharp unanticipated drop in oil prices, sovereign rating downgrades of oil-exporting countries could be sharper than the deterioration in their economic fundamentals.