You can expect, and even excuse, the country's ignorant politicians for making statements attacking the global credit rating agency Moody's Investor Services for threatening to downgrade India's credit rating. What is really alarming, however, is that a large number of academics and journalists, not normally known for being jingoistic, have decided to join hands with the political class -- indeed, they've been a lot more voluble.Sure, Moody's and a host of credit rating agencies like it, have made unforgivable mistakes in the case of the south-east Asian countries by not downgrading them in time. More so when several analysts had been issuing warnings for a long time stating that the huge foreign debts of some of these countries were unsustainable. Both Moody's and Standard & Poor's, for example, said Thai bonds were investment grade as late as June, and said that they were close to junk only five months later.
But the point is, it wasn't just the rating agencies such as Moody's that went so horribly
wrong. In its annual report published in September, the IMF congratulated Korea for its efficient economic policy! Nor, till a few months before the crisis erupted, was the Asian Development Bank much better informed.
It's also true that this is not the first time that credit rating agencies have gone wrong, either in their ratings of companies or of countries. In India, for example, disasters like those relating to CRB Finance could have been avoided, or at least mitigated, had the credit rating agency in question -- the IDBI-promoted CARE -- rated the company properly. What concerns us presently, however, is whether Moody's is justified in wanting to review India's rating, with a possible downgrade. Or whether, as various Finance Ministry officials have been saying, nothing has happened in the last few months to trigger off a re-assesment. They're right, nothing material has happened in the last few months -- nothing material enough to make one believe that the fiscal situation is getting any
better.
Political uncertainty is getting worse and continues to play havoc with investment sentiments. Industry mood also continues to get more pessimistic -- a recent survey of corporates by FICCI shows that 97 per cent of corporates feel that the current slowdown will continue for around 6 to 9 months. Forty five per cent, in fact, felt the slowdown would last for more than a year.
More important, the sharp fall in the value of Asian currencies has hit India's export competitiveness and is also likely to result in a fall in foreign institutional investments (FII) into India this year -- as most FIIs have lost big amounts of money in south-east Asia (Peregrine has got wiped out and is yet to find a buyer), they are likely to invest less. The last two months, in fact, has seen net outflows from these investors in India. That means that the rupee will also continue to remain under pressure.
The sharp fall in the value of south-east Asian currencies is also certain to cause serious problems for Indian
industry. While Daewoo Motors' decision to cut the price for its Cielo models is a good thing for consumers, it also signals the kind of competitive pressures that local industry will have to face. Prices of petrochemicals have also fallen tremendously as Asian producers are desperate to liquidate stocks. Prices of polypropylene, for instance, which were around $540 per tonne in September are now down to $405 -- half of the $805 per tonne being seen around a year ago. Forecasters who were expecting 1998 to be a moderately good year are now expecting it to be a terrible year.
As a result of the sharp fall in global prices of PFY -- 20 per cent in the last one month -- for instance, the Rs 1,200 crore Indo Rama Synthetics, for example, has lost close to Rs 14 crore of revenue in just the last three months. The group which is in the midst of a cash-crunch, expects things to improve in the next few months with global prices having bottomed out already. Even its top management, however, agree that a lot will
depend on how global prices move -- any further price cut and their troubles could become more serious. Indo Rama, incidentally, is one of the better synthetic yarn producers in the country -- several others such as Orkay and JK Synthetics shut shop a long time ago.
It is issues such as these -- growth in 1997-98 is likely to slump further from last year's 6.3 per cent to around 5 -- that have, in fact, prompted the broking house HSBC Batlivala & Karani to lower their GDP growth forecast for the next year. It is also precisely for this reason of increased competition that credit rating agencies across the country have been downgrading the debt offerings paper of various manufacturing companies such as JK Industries, Voltas, and Bombay Dyeing over the past few months.
Interestingly, credit rating agencies such as Moody's and organisations such as the IMF are being blamed today precisely because they did not heed the warning signs in south-east Asia. Surely then, they can't be blamed for heeding the warningsigns in the Indian case and there are a lot of these in the country these days.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
