Elections, Opportunism, Partisanship and Sovereign Ratings in Developing Countries

Abstract

We empirically examine whether and how opportunistic and partisan political business cycle ("PBC") considerations explain election-period decisions by credit rating agencies ("agencies") publishing developing country sovereign risk-ratings ("ratings"). Analyses of 391 agency ratings for 19 countries holding 39 presidential elections from 1987-2000, initially suggest that elections themselves prompt rating downgrades consistent with opportunistic PBC considerations, that incumbents are all likely to implement electionperiod policies detrimental to post-election creditworthiness. But more refined analyses, integrating both opportunistic and partisan PBC considerations in a unified framework, suggest that election-period agency downgrades (upgrades) are more likely as right-wing (left-wing) incumbents, become more vulnerable to ouster by challengers. Together, these results underscore the importance of integrating both opportunistic and partisan PBC considerations into any explanation of election-period risk assessments of agencies and, perhaps, other private, foreign-based financial actors important to the pricing and allocation of capital for lending and investment in the developing world.

How Do MNCS Vote in Developing Country Elections?

“…These election-year effects on the count of MNC project announcements translate into swings worth hundreds of millions or even billions of dollars in FDI. Developing country political business cycles have statistically significant and economically substantial effects on long-term infrastructure, manufacturing, and service projects sponsored by MNCs that are similar to political business cycle effects documented previously (Vaaler et al, 2005(Vaaler et al, , 2006 for developing country bondholders and major credit agencies. More broadly, these results suggest that political business cycle theoretical models and developing country empirical settings provide management researchers with new lenses and evidentiary sources for broadening and deepening understanding of often divergent but perhaps at times convergent interests of investing MNCs and host governments.…”

“…My integrated theoretical framework finds precedents in previous studies by Block (2005, 2006), who developed similar frameworks to explain election-period risk assessments by investors in "sovereign" bonds issued by developing country governments (Vaaler et al, 2005) and election period sovereign risk assessments of national government creditworthiness by major credit-rating agencies (Vaaler et al, 2006). Although noteworthy, these previous frameworks and related evidence about foreign financial actors and election-period risk may not easily extend to MNC managers and the investment projects they sponsor in developing countries.…”

“…From this framework, I derive two hypotheses. The framework follows similar ones explaining electoral period risk assessments by sovereign bondholders (Vaaler et al, 2005) and major credit rating (Vaaler et al, 2006). The framework builds on two important assumptions drawn from political business cycle theory.…”

The Political Determinants of Government Bond Holdings

“…Vaaler et al (2006) find that while countries governed by a right-wing party are more likely to be upgraded by rating agencies in non-election years, they are also significantly more likely to be downgraded when the incumbent government is expected to be replaced by a left-wing challenger. Using information from the DPI, we test for the impact of having a right-wing or left-wing party in power relative to a centrist executive party.…”

The role of sovereign credit ratings in fiscal discipline

“…Vaaler et al (2006) contend that the issue is generally discussed in the context of developed rather than developing countries. These authors also argue that while evidence of opportunistic politicians in industrialized countries is mixed, empirical studies on developing countries mainly confirm the proposal that politicians follow their political objectives.…”