LAUSR

ABSTRACT Changes in oil prices differently impact the macro fundamentals of oil-importing and oil-exporting countries. For the latter, oil price booms improve fiscal policy, real exchange rate due to the inflow of foreign currencies, sovereign creditworthiness and political stability since the state can fund social welfare programs. Resource reallocation occurs due to increased oil production. Conversely, declining oil prices harm oil-importing countries through the trade channel. This study takes the view that oil price returns and its volatility have asymmetric and nonlinear causal effects on the sovereign credit risk of oil-exporting and oil-importing countries. Changes in oil prices may need to be priced in sovereign credit risk. However, in some exceptional cases, changes in sovereign credit risk may need to be priced in pricing oil commodity. Asymmetric and nonlinear causal dynamics between oil and sovereign credit risk may help policymakers in alleviating the sovereign cost of debt capital and fiscal instabilities.