Credit Rating and the Economy
You may have read these headlines in the front page or the business sections of our newspaper. Have you ever wondered why the topic of their headlines has become a source of concern and worry of our economists? Why do you think a credit rating is necessary for our economy?
Like ordinary borrowers, countries like the other country are affected by credit ratings made by credit ratings agency. A credit rating agency is a company that routes the ability of a person or company to pay back a loan. The rating given by a credit rating agency is important into consideration in determining a country’s capacity to meet its financial obligations.
There are about 100 credit rating agencies world wide. But it has been the credit ratings of agencies like Moody’s and standard and Poor’s that have influenced the economies of nations around the world.
Effect of credit ratings on the economy. An upgrade of a country’s credit ratings would result in the influx of investments to the nation is economy, foreign investors are assured of the credit worthiness of a country. This gives them more confidence to invest their money in the stock market. As a result, more dollars are pumped into the economy, thus causing an appreciation of the money.
On the other hand, a downgrade of country’s nation economy, as rule a credit rating downgrade all its companies when this happens, investment made on local companies are affected. A downgrade on the country’s bonds moved come all to the country investment instruments a lot less attractive. This in effect would destruct the healthy flow fixed and portfolio investment into the country and result in a weaker money equivalent. The less dollars investors trade for our local currency the more the peso depreciates.
