The rating action follows further weakening of the state’s finances in the aftermath of Covid-19
Global rating agency Standard & Poor’s (S&P) on Thursday lowered Kerala’s long-term credit rating to ‘BB-’ from ‘BB’, indicating further weakening of the already weak fiscal metrics of the state, but retained the ‘stable’ outlook.
“The Indian state’s pressing need to alleviate the fallout of the pandemic on the back of diminished fiscal revenue streams will widen the government’s after-capital-account deficits to more than 25% of adjusted total revenues,” S&P said.
Kerala’s capacity to self-finance is limited, leading to the state increasing its debt to deliver on basic services. Weak revenues forced the state to use up 91% of its Q1FY21 market borrowing quota of Rs 6,500 crore in the first instance of state development loan (SDL) auction on April 7.
‘BB-’ indicates that the rated body is less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
“We estimate the state’s fiscal response to support economic recovery will lead its tax-supported debt to increase to 239% of consolidated operating revenue by fiscal 2022-2023. Kerala’s direct debt will continue to increase as it funds essential upgrades and new infrastructure, besides supporting vulnerable sections of the population,” the rating agency said. It also downgraded the ratings on Kerala Infrastructure Investment Fund Board’s Rs 5,000-crore medium term note (MTN) programme and the Rs 2,150-crore senior unsecured offshore bonds or ‘masala bonds’ to ‘BB-’ from ‘BB’. KIIFB is the main vehicle for the state to finance its infrastructure projects.
As against a prudent level (as suggested by the NK Singh-led panel) of 20%, Kerala’s debt-to-GSDP ratio has detoriarated in recent years — from 30.2% in FY17 to an estimated 30.8% (budget estimate) in FY20. The debt level has increased despite the state’s effort to bring down fiscal deficit to within the FRBM mandated 3% of GSDP in FY20 from 4.2% FY17.
“This will aggravate the state’s interest burden and increase its operating expenditure. We forecast Kerala’s interest expense as a percentage of adjusted operating revenues will average 21.8% over fiscals 2019-2021, significantly higher than that of international peers and some domestic peers,” S&P noted.
The rating agency said the “stable outlook” reflected its view that Kerala will continue to have strong access to domestic capital markets and liquidity support from the Reserve Bank of India.