“Economic output does not directly repay public debt; government revenue does.” This observation by Professor Torsten Schmidt captures a central challenge facing countries seeking investment-grade sovereign credit ratings: economic potential must translate into the fiscal capacity to meet debt obligations.

Speaking at the 6th International Credit Rating Webinar on 8 October 2026, Professor Schmidt, Head of Macroeconomics and Public Finance Research at RWI, and Prof. Kai Gehring, Associate Professor of Economics at the University of St. Gallen, highlighted the economic and institutional reforms required to strengthen sovereign creditworthiness.

Revenue Mobilisation Beyond Economic Growth

Professor Schmidt argued that economic growth must be accompanied by stronger revenue generation. While a growing economy can expand the resources available for taxation, the government’s ability to collect revenue remains central to its capacity to service public debt.

This distinction is particularly relevant to Nigeria, where Prof. Gehring estimated government revenue at approximately 10% of GDP. He also noted that interest payments consume more than half of federal revenue, limiting the resources available for other government obligations. Investment-grade countries generally record higher revenue-to-GDP ratios, underscoring the importance of broadening the tax base and improving revenue collection.

The panelists also cautioned against relying solely on debt-to-GDP ratios to assess creditworthiness. Professor Schmidt pointed to countries with high debt levels that retain the capacity to meet their obligations, explaining that institutional effectiveness and the broader economic environment also influence sovereign ratings.

Investment Grade Is a Marathon, not a Sprint

For Prof. Gehring, the timeframe for achieving investment-grade status is as important as the reforms themselves. He described the journey as “a marathon, not a sprint”, citing research showing that only one of 35 sovereigns with ratings similar to Nigeria’s had reached investment grade within five years.

The observation highlights the limits of expecting rapid rating improvements. Countries must demonstrate that reforms can deliver sustained results rather than temporary improvements that may be reversed over time.

Professor Schmidt similarly emphasised the importance of productivity, capital formation and higher income per capita in supporting long-term credit quality. He also identified government efficiency, the rule of law and the quality of the legal environment as important factors in sovereign rating assessments. 

The Test of Reform Continuity

Beyond economic performance, the durability of reforms remains critical to investor confidence. Prof. Gehring noted that rating assessments consider whether policy improvements are likely to continue over the life of long-term government bonds. Changes in Government that lead to policy reversals can therefore undermine progress towards stronger credit ratings.

He argued that reforms are more likely to endure when their benefits are shared across political parties, regions and groups, creating broader domestic support. Transparency and reliable public data are also important, enabling investors to assess economic conditions, public finances and security risks more effectively.

Professor Schmidt added that fiscal rules can help direct public borrowing towards productive investment rather than current consumption. For commodity-dependent economies, diversifying exports and reducing exposure to oil-price fluctuations can further strengthen resilience. A stable inflation and exchange-rate environment, supported by credible monetary institutions, can also encourage private investment.

The discussion underscored that achieving investment-grade status requires more than favourable economic indicators. Stronger revenue mobilisation must be supported by effective institutions, credible policies, and reforms that remain in place long enough to produce measurable improvements in sovereign creditworthiness.