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AGENCIES
New York, Oct 22: Standard & Poor's on Thursday lowered the country's long-term foreign- currency sovereign credit-rating to BB from BB-plus and its long-term local- currency sovereign credit-rating to BBB from BBB-plus. Short-term foreign- currency rating of B was affirmed, though. At the same time, S&P assigned its A-3 short-term local-currency rating to the country. The outlook on the long-term rating was changed to stable from negative.
Following the series of nuclear tests, the agency, on May 22, had downgraded the country's outlook, while reaffirming its sovereign ratings. The change in the outlook reflected the erosion of the country's external financial position after US and other countries imposed sanctions.
The current downgrade reflects fading prospects for meaningful fiscal adjustments, weakening the sustainability of recent economic growth rate and potentially further raising the country's already high external debt burden. The consolidated government deficit (including state governments) islikely to remain around 8 per cent of the GDP annually over the next three years.
General government debt, including debt guarantees increasingly offered by state governments, is likely to exceed 70 per cent of the GDP in the coming years, while interest payments alone are likely to consume nearly half of the central government's revenue. In the absence of significant fiscal adjustment, public sector debt will grow as a share of the GDP, as real interest rates on government's borrowings begin to exceed the real GDP growth. The financing of fiscal deficit, alongwith that of non-financial public sector enterprises as a whole, could consume nearly 40 per cent of the annual flow of the domestic savings. The inefficient use of much of domestic savings will continue to constrain growth and development prospects.
Economic reforms raised the average GDP growth above 6 per cent in recent years, but also raised expectations and political pressure to maintain growth momentum. Further trade- and financial-sectorliberalisation increases the risk of high fiscal imbalances, leading to a larger current- account deficit. Persistent fiscal pressures in a more liberalised economy will undermine the country's ability to maintain economic growth in the medium term without increasing its current-account deficit and external- commercial borrowings, thereby raising its already high external-debt burden. Total external debt is estimated to reach 180 per cent of exports this year, among the highest of rated sovereigns.
OUTLOOK STABLE
The stable outlook balances persistent high consolidated government deficit with on-going regulatory and structural reforms. The change of government earlier this year once more underscored the resilience of the country's cross-party consensus in favour of cautious reform, which largely insulates economic policy from the instability and volatility of weak coalition government. Foreign exchange reserves, which are likely to equal 150-200 per cent of short-term debt this year, are expectedto mitigate the risk of a precipitous loss of external confidence even as export stagnates and trade gap widens.
A renewed commitment to trade liberalisation, alongwith more transparent and consistent policies for foreign direct investment, could stimulate exports and limit the increase in external debt in the medium term. This, alongwith privatisation and steps to raise cost recovery in public services (especially electricity), could improve prospects for a sustainable fiscal corrections and boost the country's creditworthiness. The combination of further fiscal pressures and an inadequate pace of structural reform could result in unsustainable, debt-financed, current-account deficit, undermining external liquidity and the country's credit standings, S&P said.
It may be recalled that in July this year, Standard & Poor's had reaffirmed India's long-term foreign currency issue credit rating of BB+ and its local currency issue credit rating of BBB+ with a negative outlook.
The global rating agency hadconfirmed the country's rating while assigning BB+ long-term and B short-term foreign currency ratings to Indian Railway Finance Corporation (IRFC). Then, S&P also assigned its BBB long-term and A-3 short-term local currency ratings to IRFC with a stable outlook.
IRFC was the first company to be rated by the agency which had revised the country's foreign currency outlook to negative from stable following sanctions by the US.
Moody's Investors Service had lowered India's foreign currency country ceilings by two notches to speculative grade. The decision to downgrade came a day after the US formally imposed sanctions on India.
S&P's sovereign rating is one notch below the investment grade while Moody's revised rating is two notches below investment grade. On August 10 this year, DCR had downgraded the country's rating to BB+ from triple B and the local currency rating to triple B from triple B+.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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