CFA L1 / FI / M15. Sovereign Credit
Module 15 · Fixed Income

Credit Analysis for Government Issuers

EN: Sovereign credit factors and municipal bonds.
VN: Yếu tố tín nhiệm chính phủ và muni.

1. Sovereign Credit Factors Concept

Five categories (S&P framework)

  • Institutional Effectiveness of policymaking, governance, transparency.
  • Economic Income per capita, growth, diversification.
  • External Current-account balance, FX reserves, external debt.
  • Fiscal Debt/GDP, deficit/GDP, debt-service capacity.
  • Monetary Inflation, central-bank credibility, currency regime.

2. Local-Currency vs Foreign-Currency Ratings Concept

  • Local Sovereign can print own currency to pay → typically higher rating.
  • Foreign Must obtain FX → lower rating, especially if FX reserves thin.

3. Municipal Bonds Concept

  • General obligation (GO) Backed by full faith and credit + taxing power.
  • Revenue Backed only by revenues of a specific project (toll road, water utility) — usually riskier.
  • Tax-exempt Federal income-tax exempt; some also state-exempt.

Practice problem Practice

Practice problem

Country X has weak FX reserves but can print its own currency. Should its local-currency or foreign-currency rating be higher?

Show solution
Local-currency: government can print own currency to pay → near-zero default risk in local terms.
Foreign-currency: must source FX → constrained by thin reserves.
Local-currency rating > foreign-currency rating