Module 61: Credit Analysis for Government Issuers Flashcards
(19 cards)
Primary source of repayment for sovereign debt?
The government’s ability to tax economic activity within its jurisdiction.
Card 2:
Key assessment for sovereign credit risk?
Evaluating factors contributing to stable economic growth with low inflation.
Card 3:
Five qualitative factors influencing sovereign creditworthiness.
Institutions & policy,
Fiscal flexibility,
Monetary effectiveness,
Economic flexibility,
External status.
What do “Institutions and policy factors” encompass?
Political and economic stability (legal protections, property rights, debt repayment culture, transparency, business-friendly policies, stable political system, peaceful relations).
and willingness to repay debt as bondholders have no recourse if governments refuse as they have sovereign immunity
What are “Fiscal flexibility factors”?
Government’s ability to adjust tax collection or spending to ensure debt service payments.
What are “Monetary effectiveness factors”?
Central bank’s ability to manage money supply and interest rates for stable growth (independent central banks are preferred).
What are “Economic flexibility factors”?
Growth trends, income per capita, and diversity of economic growth sources.
What are “External status factors”?
Country’s currency standing internationally (reserve currency status, geopolitical risks).
Three quantitative factors influencing sovereign creditworthiness.
Fiscal strength, Economic growth and stability, External stability.
How is fiscal strength measured?
Low debt-to-GDP, debt-to-revenue, interest-to-GDP, and interest-to-revenue ratios.
How is economic growth and stability measured?
High real GDP growth, large real economy size, high per-capita GDP, low volatility of real GDP growt
How is external stability measured?
High foreign exchange reserves to GDP, high foreign exchange reserves to external debt, low long-term external debt to GDP, low near-term external debt to GDP.
How are foreign exchange reserves typically built up?
Through a current account surplus (exporting more than importing). Concentration in a single commodity increases risk.
Examples of non-sovereign government debt issuers.
Agencies, Government sector banks/financing institutions, Supranational issuers, Regional governments.
Credit rating of agency debt?
Usually similar to the relevant sovereign debt rating due to implicit government support.
Two main types of regional government bonds.
General obligation (GO) bonds: unsecured bonds backed by the full faith and credit of the issuing non-sovereign government entity, which is to say they are supported by its taxing power.
Revenue bonds: issued to finance specific projects, such as airports, toll bridges, hospitals, and power generation facilities.
Which type of regional government bond typically has higher credit risk?
Revenue bonds, because the project is the sole source of funds to service the debt..
