Sovereign Bond Credit Analysis

Summaries

Two risks to watch out for:

1)      Economic Risk (representing the ability of the government to pay the debt)

2)      Political Risk (representing the willingness of the government to pay the debts)

Two types of rating:

1)      Local currency debt ratings

2)      Foreign currency debt ratings

Questions

1. Why local currency debt rating is usually higher than the foreign currency debt rating?

This is because government is more prone to fail the payment of foreign currency debt when there is depreciation in their own currency as they have to purchase foreign currency to repay the debt. While for local currency debt, they can repay much easier by controlling domestic spending or tax revenue.