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FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

A sovereign has external debt of USD 60 billion, with USD 15 billion maturing within one year. Foreign exchange reserves are USD 12 billion, and the current account deficit is expected to be USD 6 billion over the next year. Ignoring other flows, which statement best describes the country's one-year external financing position?

The country has a USD 9 billion shortfall. Its one-year needs are USD 15 billion of short-term debt plus a USD 6 billion current account deficit, totaling USD 21 billion, while reserves are only USD 12 billion. Without rollover or new financing, the gap is USD 9 billion.

  1. AReserves cover short-term debt and the deficit, with USD 9 billion left over
  2. BThe country has a USD 9 billion shortfall relative to reserves, assuming no rollover or new financingCorrect
  3. CThe shortfall is USD 3 billion because only short-term debt matters
  4. DThe shortfall is USD 54 billion because all debt must be refinanced

Explanation

One-year needs = short-term debt 15 + current account deficit 6 = 21. Reserves are 12, so the gap is 21 - 12 = 9 billion without rollover or new financing. Counting only short-term debt gives a 3 billion gap, ignoring the deficit; counting all debt overstates the one-year need.

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