Credit Risk Rating Model of Developing Countries by Independent Component Analysis

The main purpose of the current paper is to introduce a model to rate credit risk indeveloping countries. Since there is no comprehensive theory for evaluation ofcountry credit risk and no complete transparency on the process of rating credit riskby involved institutions then the first aim of the research is to find variables whichhave most impact on country risk. To gain this purpose, twenty eight financial andeconomical variables having most impact on rating country risk, based on relevanttheories and previous researches, will be selected. Then by applying "IndependentComponent Analysis (ICA)" we could find nine variables out of twenty eight onesthat have most influence on rating country risk between 2002-2006. Results showsthat ratio of gross fixed investment to the GDP and percentage of total external debtto the export have positive and negative effect on countries rating. Finally estimationof the model shows this model has the ability to justify 96% of the variance incountry credit rating (based on the results provided by Fitch and S&P institutes).