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CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers

A sovereign's government debt is 90% of GDP, and its interest payments consume a large share of tax revenue. Which additional characteristic would most likely strengthen the analyst's view of its fiscal flexibility?

A broad tax base with room and demonstrated willingness to raise tax rates would most strengthen the view of fiscal flexibility, because it shows the government can increase revenue to service debt. Heavy short-term maturities and foreign-currency borrowing instead raise refinancing and currency risk, weakening creditworthiness.

  1. AA large share of debt maturing within one year
  2. BA high ratio of foreign-currency debt to total debt
  3. CA broad tax base with room to raise rates and a record of doing so when neededCorrect

Explanation

Fiscal flexibility is the capacity to raise revenue or cut spending to service debt. A broad tax base with proven willingness to raise taxes supports this. Short maturities and foreign-currency debt both increase refinancing and currency risk, weakening credit quality.

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