| Summary: | This paper surveys methodological issues
in subnational credit ratings and highlights key challenges
for developing countries. Subnational borrowing from capital
markets has been on the rise owing to fiscal
decentralization and demand for infrastructure investments.
A prerequisite for accessing capital markets, subnational
credit ratings have also emerged as a part of broader reform
for fiscal sustainability. They facilitate a more
transparent budgetary and financial management system. The
global financial crisis makes subnational credit ratings
more relevant, as they contribute to fiscal risk evaluations
and fiscal adjustment. In addition to subnationals own
credit strength, the creditworthiness of the sovereign and
the intergovernmental fiscal system are among the most
critical rating criteria. Implicit and contingent
liabilities are integral to the rating process. Indirect
debt instruments including off-balance-sheet financing
create fiscal risks. The ongoing financial crisis has
reinforced the rating focus on the management of liquidity,
debt structure, and off-balance-sheet liabilities.
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