CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers
Which of the following developments would an analyst most likely view as a weakening of a sovereign's external position?
A persistent current account deficit financed by short-term foreign borrowing weakens the external position, because it leaves the country dependent on foreign capital that can reverse quickly and strains foreign exchange availability. Rising reserves and reserve currency status instead improve external strength.
- AA persistent current account deficit financed by short-term foreign borrowingCorrect
- BRising foreign exchange reserves from a trade surplus
- CA reserve currency status for its domestic currency
Explanation
Persistent current account deficits funded by short-term foreign capital leave the country exposed to sudden reversals and refinancing stress. Rising reserves and reserve currency status strengthen the external position.
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