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What is a Sovereign Credit Rating?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 November 2016
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A sovereign credit rating is the credit score or rating that is applied to some type of sovereign entity, usually a government. Corporations often consider this rating when determining whether to open facilities within the borders of that sovereign entity, or to invest in businesses that are already established within that nation. When assessing the overall risk associated with making some sort of investment in that nation, investors will not rely solely on the crediting, but do generally consider the rating to be important in making the final decision.

Much of the basic criteria for determining any type of credit score is also utilized with the calculation of a sovereign credit rating, just on a larger scale. The process involves looking closely at the balance between imports and exports, the general economy of the nation in question, and factors such as the presence of political unrest that could threaten the health of that economy. While every sovereign entity carries some degree of risk, the idea is to determine if the degree of risk present is sufficient to prevent establishing a presence in that nation, or doing business with companies based in that country.

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One of the ways that the sovereign rating influences the general economy is in the area of establishing interest rates on various types of loans. Since the credit score has a lot to do with how easily the nation can borrow money, and what rate of interest the country must pay for those loans, it has a direct effect on how much interest lenders charge for loans granted within that country. This means that if a nation has a high sovereign credit rating, chances are the interest rates charged on car loans, mortgages, and other types of consumer loans will be much more competitive.

While the sovereign credit rating is an important consideration for potential investors, other factors are also important to take into account. This is because a nation may have an excellent credit rating, even while experiencing a downturn in the value of its investments. At the same time, a nation may have a lower rating, but be currently enjoying excellent returns on its holdings. In addition, making long-term commitments within that country involves projecting changes in factors such as political risk, as well as considering the potential for change in the factors that determine the current rating. For this reason, a sovereign credit rating is sometimes considered the foundation for analyzing the potential of a nation, but not the only factor that must be assessed in order to reach a balanced decision regarding involvement with that country.

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