ALRAQABA . ISSUE 20 39 increase demand for government bonds, boost investors’ confidence, and attract foreign investments. Sovereign credit ratings also enable investors to assess investment risks and the extent of the country’s financial stability and effectively compare investment decisions. Moreover, the sovereign credit rating also dramatically affects the determination of the financing cost and the country’s interest rate on loans. When a country fails to obtain a high credit rating, it results in a high cost of funding and interest rate, while receiving a high credit rating leads to a reduction in the price of financing and, thus, an increase in demand for country bonds in global markets. On the other hand, the country’s credit rating affects the credit ratings of companies and financial institutions in that country, as companies do not receive a higher rating than the country itself. Fourth: Credit Rating Criteria: Global rating agencies use several criteria or factors to assess the financial solvency of countries and determine their credit rating. These criteria fall under several main areas, such as economic strength, institutional strength of the country, financial strength or flexibility, and political stability. The criteria include quantitative and qualitative indicators to ensure an accurate and efficient assessment and classification of countries. The criteria used to assess the solvency of countries and determine the credit rating among global agencies vary. The most important of these criteria are as follows: • Gross Domestic Product (GDP): GDP represents the country’s income level and economic situation. The rise in GDP indicates the growth of the country’s economy and, thus, its ability to pay its financial obligations, consequently leading to a rise in its credit rating. Per capita GDP is often used as an indicator to assess the country’s credit rating. • Political stability: The political situation in countries is assessed in terms of the risks of war or political instability that may lead to default on debts and obligations. The more stable the political situation in the country is, the higher its credit rating will be. • Inflation: The inflation rate is one of the main factors when assessing countries’ solvency. The inflation rate and its stability reflect the efficiency of the country’s monetary policies, as central banks raise the interest rate to resist inflation, which leads to high costs. In addition, high or volatile inflation rates may lead to political and economic instability. Therefore, countries with low and stable inflation rates obtain high credit ratings. • Economic diversification: Economic diversification is one of the most important criteria as it reduces the economic risks that countries may be exposed to and enhances flexibility and stability as countries with diversified economies are considered less risky and thus obtain high credit ratings. • Other: International agencies consider many factors and criteria when determining countries’ sovereign credit rating. To name a few, unemployment rates and degree of transparency in countries, economic development as well as average per capita national income, the date of default of countries, and other economic and financial factors. Fifth: Credit Rating of the State of Kuwait: Kuwait has always maintained advanced credit ratings that reflect the stability and strength Articles
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