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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers

A rating agency assesses a sovereign that has a large fiscal deficit and heavy debt, but strong institutions, a diversified economy, and a record of honoring obligations. Which factor is most likely to support a higher rating?

A history of timely debt service most likely supports a higher rating, since it signals strong willingness to pay along with institutional strength. Rapid growth in debt-to-GDP and reliance on one commodity export both weaken the sovereign's credit profile and would tend to pressure the rating.

  1. AWillingness to pay based on a history of timely debt serviceCorrect
  2. BA rapid increase in the debt-to-GDP ratio
  3. CHeavy reliance on a single commodity export

Explanation

Sovereign analysis considers both ability and willingness to pay. A record of honoring obligations and strong institutions support willingness and rating. Rising debt-to-GDP and single-commodity dependence are weaknesses.

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