Sovereign credit ratings: India

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This is a collection of articles archived for the excellence of their content.

Credit/GDP ratio and GDP growth for China and India and respective S&P rating, 2009-16; The Times of India, May 25, 2017

Contents

2016

Credit/GDP ratio and GDP growth for China and India and their respective S&P ratings, 2009-15; The Times of India, Feb 1, 2017
India's sovereign credit ratings in 2016, according to Fitch, Moody’s, S&P
The Times of India

S&P: a stable BBB-

S&P retains India's credit ratings as stable, Nov 03 2016 : The Times of India


Says Unlikely To Upgrade For Two Years

S&P has retained India's `BBB-' long-term sovereign credit ratings with a stable outlook but has said it is unlikely to upgrade the country's ratings in the next two years as public finances remain weak.

The government had made a strong pitch to global agencies to upgrade the country's ratings and pointed to the string of reform measures which had been unveiled.

“The stable outlook balances India's sound external position and inclusive policymaking tradition against the vulnerabilities stemming from its low per capita income and weak public finances,“ S&P said in a statement. “The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts.“ The BBB (-) is the lowest investment grade rating.

It said upward pressure on the ratings could build if the government's reforms markedly improve its general fiscal out-turns and the level of net general government debt, so that it falls below 60% of GDP .

“Downward pressure on the ratings could re-emerge if growth disappoints (perhaps as a result of stalling reforms); if, contrary to our expectations, the new monetary council is not effective in achieving its targets; or if the external liquidity position deteriorates more than we currently expect,“ the agency said.

But it said that India's governing parties have made progress in building consen sus on passage of laws to address long-standing impediments to the country's growth.“We believe these measures, supported by India's well-entrenched democracy , will promote greater economic flexibility and help redress public fi nances over time.“

S&P said a rating constraint is India's low GDP per capita, which the agency estimates at $1,700 in 2016. It expects the economy to grow by 7.9% in 2016 and 8% on average over 2016-2018.

How India lobbied Moody's for ratings upgrade, but failed

Exclusive - Aditya Kalra and Rajesh Kumar Singh | How India lobbied Moody's for ratings upgrade, but failed, Fri Dec 23, 2016 | Reuters.com


India criticised Moody's ratings methods and pushed aggressively for an upgrade, documents reviewed by Reuters show, but the U.S.-based agency declined to budge citing concerns over the country's debt levels and fragile banks.

Winning a better credit rating on India's sovereign debt would have been a much-needed endorsement of Prime Minister Narendra Modi's economic stewardship, helping to attract foreign investment and accelerate growth.

Since storming to power in 2014, Modi has unveiled measures to boost investment, cool inflation and narrow the fiscal and current account deficits, but his policies have not been rewarded with a ratings upgrade from any of the "big three" global ratings agencies, who say more is needed.

Previously unpublished correspondence between India's finance ministry and Moody's shows New Delhi failed to assuage the ratings agency's concerns about the cost of its debt burden and a banking sector weighed down by $136 billion in bad loans.

In letters and emails written in October, the finance ministry questioned Moody's methodology, saying it was not accounting for a steady decline in the India's debt burden in recent years. It said the agency ignored countries' levels of development when assessing their fiscal strength.

Rejecting those arguments, Moody's said India's debt situation was not as rosy as the government maintained and its banks were a cause for concern, the correspondence seen by Reuters showed.

Moody's and one of its lead sovereign analysts, Marie Diron, declined to comment on the correspondence, saying ratings deliberations were confidential. India's finance ministry did not respond to requests for comment.

Arvind Mayaram, a former chief finance ministry official, called the government's approach "completely unusual".

"There was no way pressure could be put on rating agencies," Mayaram told Reuters. "It's not done."

DEBT BURDEN, BAD LOANS

India has been the world's fastest growing major economy over the past two years, but that rapid expansion has done little to broaden the government's revenue base.

At nearly 21 percent of gross domestic product (GDP), India's revenues are lower than the 27.1 percent median for Baa-rated countries. India is rated at Baa3 by Moody's, the agency's lowest notch for debt considered investment grade.

A higher rating would signify to bond investors that India was more creditworthy and help to lower its borrowing costs.

While India's debt-to-GDP ratio has dropped to 66.7 percent from 79.5 percent in 2004-05, interest payments absorb more than a fifth of government revenues.

Moody's representatives, including Diron, visited North Block, the colonial sandstone building in the Indian capital that houses the finance ministry, on Sept. 21 for a discussion on a ratings review.

The atmosphere at the meeting with Economic Affairs Secretary Shaktikanta Das, one of the ministry's most senior officials, and his team was tense, according to an Indian official present, after Diron had told local media the previous day that a ratings upgrade for India was some years away.

On Sept. 30, Moody's explained its methodology to Indian officials in a teleconference.

LOBBYING FOR AN UPGRADE

Four days later, the finance ministry sent an email to Diron questioning Moody's metrics on fiscal strength. The government cited the examples of Japan and Portugal, which enjoy better ratings despite debts around twice the size of their economies.

"Given that countries are on different stages of economic and social development, should countries be benchmarked against a median or mean number (as is done by Moody's)" the email asked.

In India's case, "while the debt burden lowered significantly post 2004, this did not get reflected in the ratings", the ministry argued.

New Delhi urged Diron to look at improvements in the factors - better forex reserves and economic growth - that Moody's had considered when handing India its last ratings upgrade in 2004.

In a reply the next day, Diron said that, not only was India's debt burden high relative to other countries with the same credit rating, but its debt affordability was also low.

She added that a resolution to the banking sector's bad loan problems was "unlikely" in the near-term.

In a last-ditch effort on Oct. 27, Economic Affairs Secretary Das sent a six-page letter to Singapore-based Diron, addressed to Moody's New York headquarters.

Reiterating points on India's fiscal strength, Das asked Moody's for a "better appreciation of the factual position".

Das dismissed Moody's concerns on India's public finances as "unwarranted" and told the agency that there was "scope for further lowering" the political risk perception to "very low".

"In the light of stable external debt parameters and the slew of reforms introduced in the realm of foreign direct investment, you may like to reconsider your assessment on 'external vulnerability risk'," he wrote.

Moody's on Nov. 16 affirmed its Baa3 issuer rating for India, while maintaining a positive outlook, saying the government's efforts had not yet achieved conditions that would support an upgrade.


(Editing by Douglas Busvine and Alex Richardson)

2017

Moody's upgrades India's rating after 14 years

Mayur Shetty, Moody's upgrades India's rating citing government reforms, Nov 17, 2017: The Times of India

Moody's upgradation of India's local and foreign currency issuer ratings, 2004-17 and its impact
From: Mayur Shetty, Moody's upgrades India's rating citing government reforms, Nov 17, 2017: The Times of India

HIGHLIGHTS

The cost of international borrowing will now become cheaper for Indian government and Indian corporates

The move will also improve the sentiment in the equity markets

The upgrade comes as a major boost to govt which has been under fire for the fallout of GST and demonetisation

International rating agency Moody's has upgraded India's local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive. The rating agency has cited+ the government's implementation of its reform programme which includes introduction of the Goods and Services Tax, Aadhaar system of biometric accounts and direct benefit transfer schemes and measures taken to address bad loans in the banking system.

The rating upgrade comes after a gap of 13 years - Moody's had last upgraded India's rating to 'Baa3' in 2004. Interestingly, the last upgrade also came under a NDA-regime led by Atal Behari Vajpayee.

The immediate impact of the rating upgrade is that the cost of international borrowing will become cheaper for Indian government and Indian corporates whose ratings are constrained by the sovereign rating. Issuers of lower rated paper have to pay higher rates to make up for the perceived credit risk. The move will also improve the sentiment in the equity markets.

" Moody's believes+ that those (reforms) implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth. The reform program will thus complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness," the rating agency said in a statement today.

The upgrade comes as a major boost to the Narendra Modi government which has been under fire for the fallout of GST and demonetisation on business. "The decision to upgrade the ratings is underpinned by Moody's expectation that continued progress on economic and institutional reforms will, over time, enhance India's high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term. In the meantime, while India's high debt burden remains a constraint on the country's credit profile, Moody's believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios," said the rating agency in a statement.

Demonetisation which has been facing severe criticism after most of the currency was returned to banks has also been viewed positively by Moody's. "Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India's institutions," the agency said.

On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility. The other reforms which have helped in the upgrade are the legislation towards fiscal responsibility and the shift to a monetary policy committee for interest rate setting.

"Adoption of a flexible inflation targeting regime and the formation of a Monetary Policy Committee (MPC) have already enhanced the transparency and efficiency of monetary policy in India. Inflation has declined markedly and foreign exchange reserves have increased to all-time highs, creating significant policy buffers to absorb potential shocks," Moody's said

Why Moody’s improved its ratings

November 19, 2017: The Times of India


Why, amidst so much controversy and bad news, is Moody’s smiling? Because a rating agency cares little about one-off events like demonetisation and GST, or other shortterm phenomena. Moody’s assesses the ability of a country or company to service its debts in the medium to long run. This means focusing on fundamentals and sustainability. And here India looks good.

The fiscal deficit has fallen, slowly but steadily, from 6.7% of GDP in 2009-10 to a projected 3.2% this year. The RBI, which once printed money merrily to accommodate reckless government spending, is now established as an independent body with a mind of its own. Monetary policy now focuses almost single-mindedly on keeping inflation around 4%, and has achieved that target. The current account deficit, which had soared to over 4% of GDP in 2013-14, declined to 1.1% in 2015-16 and 0.7% in 2016-17. Warning: the deficit jumped up to 2.4% in the first quarter, but Moody’s clearly sees this as a blip, not a trend. Foreign exchange reserves have soared to $400 billion, strengthening India’s ability to withstand future shocks. In sum, India’s macroeconomic indicators are looking strong and sustainable.

Rating agencies also assess policies and reforms. Narendra Modi has (except for demonetisation) proved to be an incrementalist, not a radical reformer. Yet enough incremental steps can add up to something substantial over several years. Direct benefit transfers in lieu of subsidies look the way forward, notwithstanding many glitches in the use of Aadhaar. Public sector banks are finally getting recapitalised and capable of lending freely. The insolvency and resolution laws seem likely to finally end the practice of crooked or inefficient promoters being bailed out forever with public money. Electricity and all-weather roads finally look like reaching virtually every village and household. Broadband is finally penetrating the countryside, and has the potential to revolutionise productivity and payments.

Yet many problems remain. Most disturbing is the lack of formal job creation, which was supposed to be Modi’s key election plank. Companies cannot get workers with the requisite skills. A terrible educational system is creating millions of useless graduates with high expectations, whom employers find unemployable. India’s much-trumpeted demographic dividend is not accruing because tens of millions of women have withdrawn from the workforce, so the proportion of workers in the population has not risen as expected. Irrigation and rail projects started a decade ago are nowhere near completion.

All government services — police, courts, schools, colleges, health centres and general administration — remain lousy and substantially corrupt. Modi shows no interest at all in much-needed administrative reform.

The problem of bad debts of banks has soared to heights unimaginable five years ago. Exports have stagnated for three years, and recent signs of dynamism have not been sustained despite a global economic recovery that should have stoked an export boom. One major textile exporter says the new GST regime has greatly cut effective subsidies for garment exports, and if unremedied will kill hundreds of factories and make 50 lakh people unemployed. The gaurakshak movement has not only sparked tragic lynchings but shrunk animal supplies to slaughterhouses, hitting beef and leather exports.

Moody’s is right to say India can safely service its medium to long-run debts. But this does not guarantee a sustainable return to tiger economy status. That requires much greater reform.

Initiatives in India leading to upgrade

5 things that led to Moody’s upgrading India’s ratings, November 17, 2017: The Times of India


HIGHLIGHTS

Ratings agency Moody's has upgraded India's ranking for the first time in 14 years. Here is a rundown of the major initiatives taken which led to the development

International ratings agency Moody's upgraded India's local and foreign currency issuer ratings t+ o Baa2 from Baa3 and changed the outlook on the rating to 'stable' from 'positive'. The upgrade, which is the first in 14 years has come on the back of a number of steps taken by the government on the economic front. Here is a look at five factors which led to Moody's thumbs up to PM Modi and his team:

1) Wide ranging reforms: The Narendra Modi-led government has been pro-active in bringing in a slew of dynamic reforms in a bid to boost the Indian economy. Amid conflicting views on demonetisation and GST (goods and services tax), Moody's has given a thumbs up to the two economic reforms. "Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India's institutions," the agency said in its report.

Another conscientious issue of linking Aadhaar to direct benefit transfer (DBT) schemes also got a pat on the back from the ratings agency as it listed the move as 'a system intended to reduce informality in the economy.'

2) Steps taken to strengthen banks: Another area where the government has actively intervened is in energising banks which have long been reeling under the pressure of bad loans. The government has introduced the Insolvency and Bankruptcy Code (IBC) to effectively fight the menace of bad loans. As a result the Reserve Bank of India (RBI) has so far identified 41 accounts (12 in June and 29 in August) which are stressed and on the verge of becoming Non-Performing Assets (NPAs). The RBI is, in fact, likely to come up with a fresh list of around 50 loan accounts in addition to the existing ones, according to reports. Last month, the government had announced a Rs 2.11-lakh crore recapitalisation package for public sector banks which is expected to boost their lending capabilities and drive private investment which has reportedly dried up.

On the fiscal front, efforts to improve transparency and accountability, including through adoption of a new Fiscal Responsibility and Budget Management (FRBM) Act, are expected to enhance India's fiscal policy framework and strengthen policy credibility. Moody's took notice of the move as it commented,"Adoption of a flexible inflation targeting regime and the formation of a Monetary Policy Committee (MPC) have already enhanced the transparency and efficiency of monetary policy in India. Inflation has declined markedly and foreign exchange reserves have increased to all-time highs, creating significant policy buffers to absorb potential shocks."

3) Promising macros: Despite the GDP (gross domestic product) growth rate taking a beating and dipping to a 3-year low of 5.7 per cent in the second quarter of 2017, various rating agencies including Moody's have predicted that a recovery is on the cards. Moody's expects GDP growth to moderate to 6.7 per cent in the fiscal year ending in March 2018. However, the ratings agency opines that as the disruption fades, assisted by recent government measures to support SMEs (Small and Medium Enterprises) and exporters with GST compliance, real GDP growth will rise to 7.5 per cent next fiscal, with similarly robust levels of growth from FY 2019 onward. "Longer term, India's growth potential is significantly higher than most other Baa-rated sovereigns," Moody's noted.

4) Foreign investments: India's foreign exchange (forex) reserves have shot up impressively as it currently hovers around $400 billion up from $359 billion in October last year. Driven by both FPIs (Foreign Portfolio Investment) in equity and bond markets and FDIs (Foreign Direct Invetment), the rupee has strengthened. The Moody's upgrade is expected to provide a fillip on this front as it will further encourage foreign investments.

"Reforms implemented to date will advance the government's objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth," the Moody's report stated.

5) Ease of Doing Business: Although not directly linked to FRiday's upgrade, it would be important to note that last month, India jumped 30 places to get the 100th slot in the World Bank's report on Ease of Doing Business. Shortly after that, the government revealed that it has chalked out more than 200 reforms including doing away with a number of 'archaic laws' to break into the top 50 bracket. Moody's echoed the aim of these initiatives saying in its report, " The reform program will (thus) complement the existing shock-absorbance capacity provided by India's strong growth potential and improving global competitiveness,"

Moody’s: health of banking system makes economy vulnerable

Bad loans in banks could trigger downgrade, November 18, 2017: The Times of India

Sovereign Credit rating, a comparison- India, China, South Africa, Philipppines, as in November 2017
From: Bad loans in banks could trigger downgrade, November 18, 2017: The Times of India

Bad loans in banks could be the weak spot in India’s economy and could risk triggering a future downgrade. Besides the standard risks to the economy arising out of fiscal slippage and from global volatility, Moody’s has cited health of the banking system as vulnerability for the economy.

According to Moody’s, recapitalization of PSU banks and proactive steps to resolve bad loans are beginning to address a key weakness in India’s sovereign credit profile. SBI chairman Rajnish Kumar said that large NPA accounts referred to the National Company Law Tribunal in July would come up for resolution in January 2018.

Bankers, however, say that since these are the first transactions the bankruptcy process is likely to get tested. Most bankers feel that bad loans will start declining only from the next financial year. Banks are also reluctant to take more defaulters to the National Company Law Tribunal as regulations require that they make 50% provisions on loans in respect of which bankruptcy proceedings have been initiated. There have been reports that the government may force banks to initiate insolvency proceedings against more borrowers.

Besides having to make high provisions, if banks do not get acceptable bids during the insolvency process, they would be required to initiate liquidation proceedings. If this happens banks might be required to make massive write- down of their loans.

The third uncertainty is over bank mergers. According to market players, investors are reluctant to make big bets on bank stocks over fears that government may decide to merge weak banks with some strong banks. Given that public sector banks do not have the flexibility to clean up their books there is fear that merger with a weak bank would hurt the stronger bank.

“While the capital injection will modestly increase the government’s debt burden in the near term (by about 0.8% of GDP over two years), it should enable banks to move forward with the resolution of NPLs through comprehensive write-downs of impaired loans and increase lending gradually,” Moody’s said.

According to Care Ratings, gross NPAs of 36 top banks have increased from Rs 2.94 lakh crore in March 2015 to Rs 3.32 lakh crore in Sept 2015 and then sharply to Rs 8.38 lakh crore in Sept 2017.

“The next two quarters would be crucial from the point of view of NPAs as it is still not clear whether or not they have been fully recognized and provided for. Private Banks too have witnessed an increase in their NPA ratios and the final picture will emerge by March 2018,” said Madan Sabnavis, chief economist, Care ratings in a report on Friday.

According to Bloomberg data, Indian companies and banks have sold $12.5 billion of foreign-currency bonds so far this year with a fourth of them coming from banks. Bankers said that the upgrade would also draw more investors into these bonds as the earlier rating was the lowest above-investment grade. Many pension funds, which are mandated to invest in only investment-grade securities, avoid bonds that are at the edge of investment grade.

SBI chief economist Soumya Kanti Ghosh said, “The ratings upgrade will have a profound impact on bond yields and lift the morose sentiments in the bond market, apart from impacting the movements in the domestic currency. The greatest irony is that despite India’s improved fundamentals, bond yields have moved in a contrarian direction. For example, if we compare India’s bond yield from the levels of 2008, it is highest among select economies. India’s bond yields are around 170 bps higher than the 2008 level.”

S&P, 2017: BBB- with a "stable" outlook

S&P maintains status quo, highlights India's growth prospects: Key points, November 24, 2017: The Times of India


HIGHLIGHTS

S&P said the growth will remain strong and the country will maintain sound external accounts position, among others

India's growth, it said, is among the fastest of all investment-grade sovereigns, and projected real GDP expansion to average 7.6% over 2017-2020


Rating agency Standard & Poor's (S&P) highlighted India's growth prospects in the coming years even as it kept its sovereign ratings unchanged at 'BBB-minus' with a 'stable' outlook. The global ratings agency said that India's stable outlook reflects that growth will remain strong+ over the next two years and the country will maintain sound external accounts position, among others.

Here are the key takeways from the agency's ratings:

1. S&P said it welcomed the government reforms, including the GST rollout and a planned Rs 2.11 lakh crore ($32 billion) capital infusion into its struggling PSU banks, while predicting the country's economy would "grow robustly" in 2018-2020.

2. It said one-off factors like the GST, hailed as biggest tax reform in the country, and demonetisation have led to some quarterly cooling in the high growth figures but the medium-term outlook for growth remains favourable.

3. The growth outlook is supported by rising private consumption, an ambitious public infrastructure investment programme and a bank restructuring plan that should help revive investment.

4. Public sector-led infrastructure investment, notably in road and rail sectors, will also stimulate economic activity while private consumption will remain robust.

5. S&P said the Narendra Modi government has managed to pass a number of reforms to address long-standing impediments to the country's growth.

6. India's growth, it said, is among the fastest of all investment-grade sovereigns, and projected real GDP expansion to average 7.6 per cent over 2017-2020.

S&P ratings comes days after Moody's Investors Service raised India's sovereign rating for the first time in over 13 years on growth prospects boosted by continued economic and institutional reforms.

Elaborating on S&P maintaining status quo in its ratings, economic affairs secretary Subhash Chandra Garg said the agency chose to play cautious and hoped that the reforms will reflect in a ratings upgrade next year.

2018

Goldman Sachs cuts India ratings after 5 years

The Times of India

5-year stock market return, India and other countries
From: The Times of India

Goldman Sachs cut India’s ratings to ‘marketweight’ from ‘overweight’ citing expensive market valuations, expected economic slowdown and risks related to the ensuing Lok Sabha polls in less than a year. This downgrade by the foreign-broking major comes after it was bullish on India for almost the whole duration of Prime Minister Narendra Modi’s government, during which the leading benchmarks nearly doubled. Analysts at Goldman Sachs have put in a NSE Nifty target of 12,000 in a year, compared to its Monday close of 11,378, a gain of 5.5%.

“We have been strategically overweight on India since March 2014 as we expected pro-growth government policies and structural reforms to drive a pickup in economic growth and a recovery in corporate profits. While earnings have improved, Indian equities have almost doubled over the past five years and outperformed the region in dollar terms,” the report said. “Given elevated valuations and the recent strong performance, we believe the risk/reward for Indian equities is less favourable at current levels and we lower our investment view from overweight to marketweight,” the report said.

Analysts at the foreign brokerage have listed five reasons for the downgrade. These include stretched valuations, macro headwinds, corporate earnings ‘catch up’ priced in, slowdown in domestic flows and event risk. Indian equities are the most expensive in Asia, trading at a record 58% premium to the region. At these levels, equities have historically posted negative returns over the next three to six months, the report said.

See also

The stock market: India

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