Getting institutional assessments right: How qualitative scores shape sovereign credit ratings

Sovereign credit ratings shape the global allocation of capital.

They influence borrowing costs, market access, and fiscal space for countries worldwide. Yet a significant share of sovereign ratings rests on qualitative governance assessments that are opaque, inconsistently applied, and often based on indicators never designed to predict default risk.

As climate volatility, geopolitical fragmentation, and debt stress reshape the global risk landscape, outdated qualitative scoring models risk mismeasuring institutional performance and mispricing sovereign risk.

This report examines the “soft” side of sovereign credit methodologies. It analyses how perception-based indicators, discretionary overlays, and legacy governance proxies, such as components of the World Bank’s Worldwide Governance Indicators, can distort institutional risk assessment when used beyond their intended scope.

The paper sets out practical reforms to strengthen the transparency, consistency, and empirical grounding of qualitative scoring. It proposes clearer links between governance assessments and actual default drivers, more forward-looking analytics, and explicit recognition of climate and nature resilience as credit-relevant strengths.

Recommendations

• Measure what actually drives sovereign credit risk: Update qualitative scoring so institutional and governance assessments are clearly linked to default risk, reducing the current reliance on weak proxies.

• Modernise qualitative scoring with advanced analytics: Use forecasting methods, pathway-based approaches and AI-enabled tools to improve forward-looking institutional risk assessment, reduce bias and strengthen consistency.

• Recognise resilience as a credit strength: Explicitly incorporate climate and nature resilience such as disaster preparedness and adaptation planning into qualitative scoring.

Why this matters

• Improving capital allocation: When governance is mismeasured, sovereign risk is mispriced. This raises borrowing costs, weakens market access and shrinks fiscal space for climate and development.

• Addressing a structural blind spot in sovereign risk assessment: While reforms have focused on improving “hard” macro-fiscal data, qualitative determinants of creditworthiness carry disproportionate weight in ratings despite being less transparent, less verifiable and more prone to inconsistency.

• Ensuring credibility in a changing risk landscape: As climate volatility, geoeconomic fragmentation and technological disruption reshape sovereign risk, outdated governance indicators and static scoring models increasingly fail to capture real-world performance, resilience and policy effectiveness.