Some developing country governments spend years making the reforms that international financial institutions want – only to find that their efforts are not rewarded.
They may make budgets more transparent, publish their debt obligations, set up independent bodies to monitor government spending, and complete an International Monetary Fund programme, but still receive the same ratings from credit agencies. Borrowing costs remain high.
The gap between what countries have built and how that progress is reflected in credit ratings and market pricing is persistent and has consequences. It translates into higher borrowing costs, tighter fiscal space, and fewer resources for public investment.
The standard explanation points to bias in method – that credit rating agencies undervalue developing country institutions or rely on indicators that favour the global north.
There is some truth in this observation, and reformers have tried solutions like more agencies, methodology reviews and transparency codes. But these don’t tackle a deeper structural problem.
Based on my work as a researcher on the working of rating agencies, it’s clear that in practice, assessments of developing countries are often made on the basis of incomplete or fragmented information. Data sits in different institutions across the country, is not always produced to a common standard, and is frequently assembled under time pressure ahead of rating reviews. What reaches external assessors is therefore, at best, a partial view of the country’s institutional and fiscal position.
The issue was a major point of discussion at the United Nations in late March 2026 when delegates convened for the inaugural special meeting on credit ratings.
A recurring theme across the discussions was the need to look upstream – at what needs to exist before the rating process actually begins. Then assessments might more accurately reflect the infrastructure that developing countries have built.
That is a meaningful shift. It moves away from demanding that credit rating agencies behave differently, and towards asking what the system as a whole needs to provide. Upstream is where the problem originates and where the most concrete action is possible.
The debate suggests a shift in how key actors, including the United Nations, multilateral development banks and sovereign borrowers themselves, are approaching the problem. This could begin to change how institutional progress is translated into credit assessments and, over time, into borrowing costs.
Constructing a country’s credit story
A sovereign credit rating is not solely formed inside a credit rating agency. It takes shape in the months and years before an analyst arrives. It happens across finance ministries, central banks, statistical offices, debt management offices and audit institutions. It’s a process of data assembly, verification and presentation that most developing country governments have never had the capacity to manage systematically.
Before a rating is issued, a country’s credit story must be constructed. Fiscal data must be gathered, reform trajectories documented, institutional changes verified and contingent liabilities disclosed. A debt management office holds one part of the picture. A central bank holds another. A statistical office holds a third.
When those parts are properly coordinated, the credit story arrives at the assessment stage in verifiable form. When they are not, documentation has to be pulled together reactively before a rating deadline, and the story arrives incomplete.
Put simply, the analyst cannot reconstruct what was never assembled. Facing incomplete information, even where the core data required is broadly similar across countries, the rational response is often conservative assessment. The uncertainty premium stays elevated, and any reforms go unrecognised – not because they did not happen, but because the system required to make it visible was never built.
This upstream process can be understood as sovereign credit formation. If it’s weak, and external assessors can’t see what genuine progress has been made, there’s a formation gap. The formation gap does not mean that all low ratings are unwarranted. It simply means the system currently has no reliable way to tell the difference between a sovereign with weak fundamentals and one with strong yet largely invisible institutions.
No actor in the current system has the mandate or the incentive to build that upstream infrastructure on behalf of the countries that need it most. That is the problem.
On top of this, developing country governments are being asked to reform in ways that will take sustained investment in institutional capacity. Better data systems; coordinated institutions; clearer evidence. That investment takes years, diverts scarce resources, and demands political commitment across electoral cycles. It is being asked of governments that don’t have the fiscal space to do it – because their borrowing costs are high.
They are being asked to solve a problem they did not necessarily create, using resources that the problem itself is consuming.
The intervention that fits
Multilateral institutions, including the United Nations and multilateral development banks, cannot change what credit rating agencies do inside their own methodologies. Assessments are made independently. Interfering with the way they do it would undermine that independence.
Recent evidence in the multilateral development bank system shows that coordination is the prerequisite to movement.
Coordination across multilateral development banks and their shareholders led first to the creation of an emerging markets credit risk database, then to the formal review of multilateral development bank lending by an expert panel appointed during Indonesia’s presidency of the G20, and then to major credit rating agencies changing their methodological processes.
The infrastructure that makes governance reforms legible to credit markets is a public good. Public goods require public investment. This is not a call for a new institution. It is a reorientation of existing ones towards a gap that nobody is currently filling.
Every sovereign that has undertaken genuine reform and watched its credit conditions remain unchanged knows the problem this article describes. They are being assessed before a full appreciation of their credit worthiness is possible. Building the upstream infrastructure to close this gap is the multilateral system’s most important contribution to sovereign credit reform.
Daniel Cash does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
