While economists, analysts, investors, bankers and others eagerly await release of the GDP data for Q4FY19-20 as well as full FY19-20 tomorrow i.e. 29th May 2020, amidst news of further extension of lock-down, the global rating agencies would be keenly watching the macroeconomic indicators to take a call on sovereign rating if not this quarter then in the coming quarters. Indian credit rating agencies, namely, CRISIL, ICRA, CARE have estimated a Q4 GDP growth of 0.5%, 1.9%, 3.6% and full year GDP growth of 4.0%, 4.3%, 4.7% respectively. India has a strong external balance backed-up by robust Forex reserves and a low current account deficit. All other macroeconomic indicators point out towards contraction in the current fiscal though the extent is uncertain. According to final figures released on 27th May 2020, US GDP shrank by 5% annual rate, higher than initial estimates of 4.8% released a month ago.
Significance of Credit Rating
A sovereign credit rating is an independent evaluation of the creditworthiness of a sovereign entity or country. These periodic rating assessment provides an insight to the investors about the extent of risk associated with investing in a debt paper of a specific country, including any political risk. Upgrading to a higher credit rating or at least status quo is essential for developing countries like India, which intend to access global bond markets for funding requirements. A ratings downgrade at this crucial juncture would lead to junk grade, a notch below investment grade.
In addition to accessing external bond markets, another vital factor for countries to secure (issuer-pay model) a credit rating is to invite foreign direct investment (FDI). Foreign portfolio investors (FPIs) have preempted a likely ratings downgrade, when equity markets witnessed massive outflows in last 3 months, though Government has attempted to restrict/control fiscal deficit while announcing economic stimulus, in anticipation of combined deficit of centre and states rising to one-sevenths of the GDP. Many countries seek ratings from the renowned credit rating agencies, namely, Standard & Poor's, Moody's, and Fitch ratings.
Determining Factors
The economic parameters closely screened and monitored by rating agencies, which varies from agency to agency includes, Real GDP growth, Real GDP growth volatility, Consumer price inflation, GDP per capita, current account deficit/surplus, Fiscal deficit, Debt, Debt structure, Debt-service ratio, Foreign currency debt, Forex reserves, and Contingent liabilities.
Debt-GDP Ratio
Considering current debt-GDP ratio of around 66% as projected by IMF, which is not too high when compared with other emerging markets of similar nature. This does mean a leeway is available to India to borrow a bit more than what it does other years, which would not affect its credit rating as debt metrics is likely to deteriorate for all the countries. Rating agency Moody highlighted risk of worsening fiscal metrics in case economic recovery takes longer than expected, which might invite a ratings downgrade. If India's fiscal stimulus is well planned and seen as aberration in dealing with the current crisis situation then it may not lead to ratings downgrade. India has to balance its debt program is such a way, not leading to fiscal slippages, that discerns quick economic turnaround.
India - Credit Rating
Keep watching this space for more updates on economic scenario!
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