Moody’s downgraded India’s ratings
Moody’s Investors Service downgraded India’s sovereign (foreign currency and local currency long-term issuer) ratings by a notch from Baa2 to Baa3, the lowest rating in investment grade, and maintained a negative outlook it had assigned last year.
What is a Credit Rating?
A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.
A credit rating can be assigned to any entity that seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.
o Individual credit is scored from by credit bureaus such as Experian and TransUnion on a three-digit numerical scale using a form of Fair Isaac (FICO) credit scoring.
o Companies and governments: Credit assessment and evaluation for companies and governments is generally done by a credit rating agency such as Standard & Poor's (S&P), Moody's, or Fitch.
These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues.
• Moody’s said the action was taken in the context of the coronavirus pandemic, but was not driven by the pandemic’s impact. The pandemic amplifies vulnerabilities in India’s credit profile that were present and building prior to the shock.
• The ratings agency cited Reasons:
o slow reform momentum
o constrained policy effectiveness
o slower growth compared to India’s potential
• The decision reflects the agency’s view that the government would be challenged in enacting policies that mitigate the risks of sustained lower growth, sharp worsening of government finances, and stress in the financial sector.
• Since Moody’s rating for India was one notch higher than S&P and Fitch Ratings, the market was expecting that it would be the first agency to lower its rating on India, bringing it at par with that of other agencies.
• Moody’s said its upgrade of India’s ratings to Baa2 from Baa3 in November 2017 was based on the expectation that effective implementation of key reforms would strengthen the sovereign’s credit profile through a gradual but persistent improvement in economic, institutional and fiscal strength.
• However, implementation of these reforms since then has been “relatively weak” and has not resulted in material credit improvements, indicating limited policy effectiveness.
Growth Forecast Government Response
• Moody’s expects India’s real GDP growth rate to contract by 4 per cent in 2020-21 due to the shock from the coronavirus pandemic and related lockdown measures.
• It expects the economy to grow 8.7 per cent next financial year and closer to 6 per cent in the subsequent year. • Government officials said India’s debt sustainability metrics remained stable and internal estimates based on the country’s expected nominal rate of growth and borrowing costs suggested that “there is no worry” on that front.
• As growth returns from FY21 onwards, our debt to GDP ratio should improve further.
India’s GDP growth slipped to an 11-year low of 4.2 per cent in 2019-20, while the fiscal deficit expanded to 4.6 per cent of the GDP as against the revised estimate of 3.8 per cent of GDP in the previous financial year.
Thereafter and over the longer term, growth rates are likely to be materially lower than in the past, due to persistent weak private sector investment, tepid job creation and an impaired financial system.
In turn, a prolonged period of slower growth may dampen the pace of improvements in living standards that would help support sustained higher investment growth and consumption.
The ratings agency said while the government responded to the growth slowdown prior to the coronavirus outbreak with a series of domestic demand stimulating measures as well as the recent support package for vulnerable households and small businesses, it does not expect that these measures will durably restore real GDP growth to rates around 8 per cent.
Other Economic issue
Credit Crunch Higher debt burden Low tax revenue
Stress in banking sector and non-bank financial institutions (NBFIs) weighs on growth dynamics through constrained supply of credit for consumption and investment, Moody’s said adding it did not expect the credit crunch in the country’s under-capitalised financial sector to be resolved quickly. Also, fiscal constraints point to a higher debt burden for longer period of time as lower real and nominal GDP growth over the medium term will diminish the government’s ability to reduce its debt burden after a significant rise due to the coronavirus economic shock. India’s large low-income population will limit the government’s tax revenue base as earlier prospects of a broadening of the tax base have not materialized
PEPPER IT WITH
CRISIL,ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.
Among other emerging markets, Moody’s has downgraded sovereign credit ratings of Mexico and South Africa and maintained a negative outlook for these two countries, while it changed its outlook on Saudi Arabia to negative from stable. In case of Mexico and South Africa, Moody’s cited deteriorating fiscal strength and structurally very weak growth.
As per Moody’s ratings scale, obligations rated Baa are termed to be medium-grade and subject to moderate credit risk and may possess certain speculative characteristics. Both Fitch Ratings and Standard & Poor’s have the lowest investment grade rating and stable outlook for India and any downgrade will now lead to junk status.