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Sovereign credit ratings and macroeconomic variables: an application of bounds testing approach to Malaysia.
ABSTRACT
This paper aims to investigate the short--and long--run macroeconomic determinants of sovereign credit ratings in developing countries. Malaysia is used as a case study. This study employed quarterly data from 1991 to 2004. We apply a recently developed time series technique called 'Auto-Regressive Distributed Lag' (ARDL) [Pesaran, Shin, and Smith, Journal of Applied Econometrics, 2001] which has taken care of a major limitation of the conventional cointegrating tests in that they suffer from the pre-test biases. Based on the above rigorous methodology, our evidence tends to suggest that both in the short-and long--run, Debt ratios such as (Debt to GDP, Debt Service to Reserve) and US Treasury Bill rate (3-months) appear to have had a significant impact on Malaysia's sovereign credit ratings. The findings of the study tend to indicate that Malaysia's short--and long-term ability to pay its debt contain information for the prediction of her credit ratings. These findings are plausible and have strong policy implications for developing countries like Malaysia. Keywords: Malaysia, sovereign credit rating, macroeconomic variables, ARDL cointegration. JEL classification codes: C22, E44 1. INTRODUCTION: THE SIGNIFICANCE AND OBJECTIVE OF THE STUDY Forces of the globalization and liberalization in world market have almost become a cliche nowadays. Besides that, our economies have now become smaller with little gap or border. Malaysia as an open and free developing country does not deny the importance of capital inflow to generate development of the economy, and therefore, the basic principle of scarcity of resources has been proven. However, there is an alternative or option to resolve the scarcity problem. One of the alternatives is getting the fund from abroad to support the productive activities. Getting capital or resources by borrowing from international market may help a country reduce the problem of scarce resour...See the full content of this document
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