An empirical assessment of sovereign country risk: The case of the Black Sea region

Country risk can be a tricky concept. It is recognized universally as a key factor to be considered prior to the undertaking of cross-border economic activity such as an investment or a financial transaction. In some cases, the level of country risk is considered low, and commercial and other risks play a far more important role in the assessment of the advisability to undertake a cross-border activity. In other cases, country risk levels are significant and may play a key role in the assessment of a cross-border activity. While objective and measurable factors should determine country risk, it appears sometimes to be a subjective measure and thus there is no single ‘correct’ answer as to the level of country risk.

This study aims to investigate the factors that determine country risk as signalled by the sovereign credit ratings assigned by the major rating agencies. In this direction panel data analysis has been used and effectively applied on three heterogeneous groups of countries, the Black Sea Economic Cooperation (BSEC) countries, the EU-15, and the Central Europe and Baltic countries over the period 2004-2013. The results generated suggest that key variables such as  GDP per capita, debt metrics and institutional factors (Worldwide Governance Indicators) play an instrumental role in explaining country risk across all country-groups. However, the individual results for each country-group provide evidence that rating agencies focus on specific economic facets of each region. In this direction, the study also examines those indicators that matter most or have a ‘specific gravity’ in determining sovereign ratings in each country-group focusing on the BSEC countries.