Global rating agency Moody’s on Wednesday downgraded China and cut its credit rating for the first time since 1989. This comes in the wake of a recent criticism by Chief Economic Advisor Arvind Subramanian who this month while delivering the VKRV Memorial Lecture had reportedly said that the rating agencies are following “inconsistent” standards while rating India and China, however, favouring more the latter.
He had said,” India had been placed in the lowest investment grade by these agencies which leads to higher cost of borrowing in the global markets due to investor risk perceptions associated with it.”
Moody’s has downgraded China one notch to a still robust A1 from Aa3 citing slowing economic growth and rising debt that it says will erode the country’s financial strength. The new rating is expected to raise borrowing costs, though it is still the fifth highest on Moody’s investment grade scale. The agency has also warned that China’s economy-wide debt is expected to rise further over the coming years while the government’s direct debt burden rises to 45 per cent of the economy by 2020 from about 40 per cent in 2018.
Moody’s expects China’s economy, the world’s second-biggest, to continue gradually slowing, with potential economic growth declining to close to 5 per cent over the next five years. Growth hit 10.6 per cent in 2010 before sliding to a near-three decade low of 6.7 per cent last year.
While rating India on November 16 last year, Moody’s had affirmed its Baa3 issuer rating for India. It had maintained a positive outlook and said that the government’s efforts had not yet achieved conditions that would support an upgrade. The global rating has reportedly declined to budge on the ratings for India so far and has said that country’s debt levels and fragile banks still remain a worry. According to Reuters, the finance ministry has questioned Moody’s methodology and has raised concerns that the agency is not accounting for a steady decline in the India’s debt burden in recent years. It has also argued that the agency ignored countries’ levels of development when assessing their fiscal strength.
On the burgeoning non-performing assets (NPAs), which have remained a big concern for the banks in India, the Modi government recently has taken policy steps that empower Reserve Bank of India (RBI) with greater powers to deal with bad loans. After the policy measure, Moody’s had said that the new mechanism to resolve the issue of massive toxic assets with the banks are broadly along the same lines as some of the earlier measures, but it doesn’t address the lack of capital at the state-owned banks, which has prevented them from writing down non-performing loans (NPLs) to realistic levels.
“These measures (Ordinance) improve the efficacy of NPL-resolution mechanisms and are a credit positive. However, they do not address the lack of capital at the state-owned banks, that has prevented them from writing down NPLs to realistic levels. We continue to expect NPL resolution to be a relatively long-drawn-out process,” Moody’s said.
It further added that these actions, while being useful in some cases, have not materially quickened the pace of NPA resolution.
This may indicate Moody’s mood towards India and the steps taken by the government. A better credit rating on India’s sovereign debt may mean endorsement of economic reforms by Narendra Modi government that may help in attracting foreign investment and accelerating growth.
According to Reuters, in letters and emails written in October last year, 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.