India Sovereign Ratings May Suffer If War Fears Persist: S&P

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Singapore, May 20: : Rising tensions with nuclear neighbour Pakistan will push India’s sovereign ratings closer to the edge if they worsen its already deteriorating fiscal situation, rating agency Standard & Poor’s said on Monday.

The rating “Depends on how long this situation will persist and affect the (bond) yields or the fiscal situation,” Mr Takahira Ogawa, S&P’s director Asia-Pacific sovereign ratings in Singapore, said.

Yields on Indian government bonds have risen to multi-month highs that are “not encouraging at all”, he said, which could raise the cost of funding the budget deficit.

S&P downgraded India’s long-term local currency rating to BBB-minus from BBB last August and said the outlook for its local and foreign currency ratings was negative, meaning they may be lowered further.

India’s long-term foreign currency ratings have been unchanged since October 1998 when S&P downgraded them to BB from BB-plus. Most foreign investors cannot put money into countries which are rated below BBB. “Even before this situation we had indicated a negative outlook which means that if the fiscal trajectory is not changed for good in the medium term we may have to consider a downgrade,” Mr Ogawa said.

“If you look at the situation of the general government debt even compared to last year it hasn’t changed much and in that sense we can say the fiscal consolidation is still not in place,” he added.

Renewed tensions in recent days on India’s long border with Pakistan, where the South Asian nations have amassed more than a million troops, have helped push the government bond yields to multi-month highs. The yield on the country’s benchmark 10-year bond rose to 8.17 per cent, up from 7.66 per cent at the start of last week. It has risen some 95 points from a lifetime low of 7.14 per cent hit in early April.

Rising yields on bonds would raise the cost of funding India’s 5.3 per cent budget deficit set for the fiscal year to March 2003. The level of government debt is set to hit 85 per cent of gross domestic product this year, according to S&P.

While Pakistan has enjoyed a stable outlook on its B-minus long-term foreign currency rating since December 1999, S&P said higher military expenditure could strain Pakistan’s fiscal conditions and hit investor confidence.