Lesson 3 of 6 · 14 min
Quantitative factors: fiscal strength and economic growth
Sovereign ratios put debt or interest over GDP or government revenue: higher debt burden and debt affordability ratios mean weaker credit, while a larger, richer, faster and steadier-growing economy means stronger credit.
In short
- Government data vary in quality, timing and comparability and get revised, so analysts take a top-down, macroeconomic approach instead of relying on public balance sheets.
- Ratio denominators are GDP (the economy that can be taxed) or government revenue, not sales or assets.
- Debt burden (debt/GDP, debt/revenue) works like leverage and indicates solvency. Debt affordability (interest/GDP, interest/revenue) works like coverage. For all four, higher = weaker credit.
- The fiscal balance (surplus or deficit as % of GDP) shows fiscal discipline and whether the debt burden is improving or deteriorating.
- Economic growth and stability: size (GDP at PPP), GDP per capita, average real GDP growth, and growth volatility (standard deviation).
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