Tiêu đề LM15 Credit Analysis for Government Issuers IFT Notes.pdf ✅

LM15 Credit Analysis for Government Issuers 2025 Level I Notes © IFT. All rights reserved 1 LM15 Credit Analysis for Government Issuers 1. Introduction ........................................................................................................................................................... 2 2. Sovereign Credit Analysis ................................................................................................................................. 2 3. Non-Sovereign Credit Risk ............................................................................................................................... 6 Summary ...................................................................................................................................................................... 8 Required disclaimer: IFT is a CFA Institute Prep Provider. Only CFA Institute Prep Providers are permitted to make use of CFA Institute copyrighted materials which are the building blocks of the exam. We are also required to create / use updated materials every year and this is validated by CFA Institute. Our products and services substantially cover the relevant curriculum and exam and this is validated by CFA Institute. In our advertising, any statement about the numbers of questions in our products and services relates to unique, original, proprietary questions. CFA Institute Prep Providers are forbidden from including CFA Institute official mock exam questions or any questions other than the end of reading questions within their products and services. CFA Institute does not endorse, promote, review or warrant the accuracy or quality of the product and services offered by IFT. CFA Institute®, CFA® and “Chartered Financial Analyst®” are trademarks owned by CFA Institute. © Copyright CFA Institute Version 1.0
LM15 Credit Analysis for Government Issuers 2025 Level I Notes © IFT. All rights reserved 2 1. Introduction This learning module covers special considerations for evaluating the credit worthiness of sovereign and other public issuers. 2. Sovereign Credit Analysis Both sovereign and non-sovereign governments issue debt which is used to conduct fiscal policy and meet budgetary needs, such as providing public goods and services (e.g. infrastructure, health care, and education.) The primary source of repayment for sovereign debt is taxes and other government revenue such as fees, tariffs, and in some cases the profits of state-owned enterprises. The ability of a sovereign government to tax all private economic activity within its jurisdiction is the primary reason that such bonds typically have the lowest credit risk of any issuer within a specific country. While sovereign bonds of advanced economies are often considered default risk-free, emerging and frontier market government bonds do involve default risk. A combination of qualitative and quantitative factors can be used to asses a sovereign issuer’s ability and willingness to pay. Qualitative Factors Qualitative factors included in the assessment are: Government Institutions & Policy: Do the sovereign government institutions and policies foster political and economic stability? Policies range from basic legal protections (e.g., maintaining the rule of law, enforcement of property rights) to promoting a culture of debt repayment, transparency, the consistency of financial data reporting, and the relative ease of doing business. Political factors include stability of domestic political institutions and the absence of conflict with neighboring countries. These factors are captured using a relative ranking or scoring approach, i.e., countries with better institutions and policies will get a higher rank. In addition to a sovereign government’s ability to pay, we must also evaluate its willingness to pay. Willingness to pay is important because of the principle of sovereign immunity, which limits investor’s ability to force sovereign government to declare bankruptcy or liquidate its assets to settle debt claims. Fiscal Flexibility: How well does a sovereign government establish and maintain fiscal discipline over time and under different economic conditions? Are tax collections properly enforced? Is the allocation to public expenditures prudent? Is the outstanding sovereign debt properly managed in relation to economic activity?
LM15 Credit Analysis for Government Issuers 2025 Level I Notes © IFT. All rights reserved 3 Monetary Effectiveness: Monetary policy is conducted by the central bank of a country. At one extreme, central banks may implement policy almost entirely independent of government intervention and influence; at the other extreme, they may simply act as the government's agent. Central bank independence from the public Treasury reduces the likelihood that a sovereign government will monetize its domestic debt, raising domestic inflation and lowering the domestic currency's external value. Economic Flexibility: Key factors to gauge the economic flexibility of a country include not only the size of the economy and level of per capita income, but also the degree of economic diversification and growth potential. Highest rated sovereign borrowers typically have an advanced and highly diversified domestic economy with strong, sustainable growth prospects. Whereas, emerging or frontier market economies often depend on a single industry or commodity. They may also have a sizable informal economy and may face challenges in collecting tax revenue. External Status: How do a sovereign government’s international trade, capital, and foreign exchange policies influence its ability to support and service outstanding debt? A key point to consider is whether a country’s domestic currency is considered to be a ‘reserve currency’, i.e., one that is fully convertible and frequently held by foreign central banks and other investors as a portion of their foreign exchange reserves. A reserve currency status greatly expands a government’s ability to access foreign investors using domestic currency debt. This flexibility minimizes the likelihood of sovereign default and increases a government’s ability to sustain higher level of debt. In contrast, many emerging and frontier market countries have exchange rate restrictions, capital controls, and/or a lack of full convertibility, which limits their ability to borrow from foreign entities. Exhibit 2 from the curriculum summarizes these qualitative factors.