S&P keeps India rating unchanged with stable outlook

S&P keeps India rating unchanged with stable outlook

Standard & Poor Global Ratings ( S&P ) retained its BBB- rating for India’s sovereign with a ‘stable’ outlook on Friday, belying expectations that it may take a cue from rival Moody’s Investor Services which upgraded the country’s credit rating last week for the first time in 13 years.

Despite one-off factors like demonetisation and the introduction of the Goods and Services Tax denting growth for two quarters, S&P expects India’s economy to grow robustly from 2018-20 with robust foreign exchange reserves rising further.

S&PHowever, the rating agency cited India’s low per capita income, the sizable fiscal deficit and high general government debt as factors that weigh down the country’s credit profile and re-iterated its BBB- rating on India with a stable outlook indicating that the rating is unlikely to see a change in the near future. A BBB- rating denotes the lowest investment grade rating for bonds

“Ratings are constrained by India’s low wealth levels, measured by GDP per capita, which we estimate at close to US$2,000 in 2017, the lowest of all investment-grade sovereigns that we rate. That said, India’s GDP growth rate is among the fastest of all investment-grade sovereigns, and we expect real GDP to average 7.6% over 2017-2020,” S&P Global Ratings said in its rating rationale.

By contrast, Moody’s Investors Services had raised India’s sovereign rating last Friday, citing the country’s high growth potential compared to its similarly rated peers and economic and institutional reforms that have been undertaken or are works in progress.

“This is clearly a conservative call wherein S&P would like to see the results of the reforms initiated before a ratings revision while Moody has taken the Call based on the reforms initiated,” said Ranen Banerjee, partner (public finance and economics) at PwC India.

“The ruling party continues to consolidate its power at the state level and, despite obstacles to the implementation of reform, strong growth is likely to continue,” S&P noted, adding that it expects Prime Minister Narendra Modi’s BJP-led coalition to make further electoral gains. These gains could help the government overcome resistance to legislative reforms in the Rajya Sabha, where the NDA still is in a minority, the rating agency said.

Taking note of the reforms that have been pushed through in recent years to address ‘long-standing impediments to the country’s growth’ such as GST, the Bankruptcy Code and a framework for resolving bad loans while recapitalising state-owned banks, S&P has also referred to the government’s focus on improving the ease of doing business as a positive for the investment climate.

“However, confidence and GDP growth in 2017 appear to have been hit by the sudden demonetization exercise in late 2016… The July 1, 2017 introduction of the GST, which combines the central, state, and local-level indirect taxes into one, has also led to some one-off teething problems that have dampened growth,” the agency pointed out, before adding that the medium-term growth outlook remains favourable.

“Nevertheless, in the medium term, we anticipate that growth will be supported by the planned recapitalization of state-owned banks, which is likely to spur on new lending within the economy. Public-sector-led infrastructure investment, notably in the road sector, will also stimulate economic activity, while private consumption will remain robust. The removal of barriers to domestic trade tied to the imposition of GST should also support GDP growth,” S&P underlined.

Soumya Kanti Ghosh, group chief economic adviser at the State Bank of India, said S&P’s rating action was not unexpected going by history but questioned its comments on India’s per capita income.

“”The argument given by S&P that India has low per capita income which is acting as detractor from the sovereign rating upgrade, is fallacious as Indonesia which was upgraded seven times between 2002 and 2011 had a low per-capita GDP of $1,066 in 2003 when its credit rating was upgraded and India’s GDP per-capita is now $1,709.4,” Dr Ghosh said.

While the stable outlook suggests the agency doesn’t expect any change in the rating soon, there could be downward pressures if GDP growth disappoints, if net general government deficits rose significantly or if the political will to maintain India’s reform agenda significantly lost momentum, S&P has said.

The rating agency has estimated public sector banks will need a capital infusion of about $30 billion to make large haircuts on loans to viable stressed projects and meet the rising capital requirements under the Basel III norms.

The bank capitalisation program and the planned ramp-up in public-sector-led infrastructure investments as well as persistent fiscal deficits at the State level will have a bearing on India’s large general government debt and overall weak public finances, S&P said, stressing these continue to constrain India’s ratings.

“India has a long history of high net general government fiscal deficits (net of liquid assets, deficits averaged over 8% of GDP over the past 20 years and 7% in the past five years). The planned large infrastructure investment program is likely to limit expenditure flexibility, even though the government is likely to be able to tap private sector funds for the construction of many of these infrastructure projects,” the agency said.

While the Centre is expected to broadly ‘succeed in controlling deficits’ and government revenues will rise due to efforts to expand the tax base such as demonetisation and GST, S&P foresees problems at the State level to ‘add 3% on average to the consolidated general government deficits over the forecast horizon.’

NEW DELHI , NOVEMBER 24, 2017 

Moody’s ups India’s rating to highest since 1991 reforms

Moody’s ups India’s rating to highest since 1991 economic reforms

Global ratings agency Moody’s revised the country’s sovereign ranking to Baa2 from Baa3 – its first upgrade in almost 14 years — citing implementation of a string of economic reforms, including demonetisation and rollout of the goods and services tax. The new rating, India’s highest since the 1991 reforms, comes as a huge boost for the government.

Moody’sThe action looks beyond the present slowdown in economic growth and a surge in bank bad loans, and bets on India’s medium- and longterm growth potential.

The markets cheered, with the rupee, bonds and equities all reacting positively. Although the rupee and the sensex gained over 1% intraday, both retracted some of their gains toward the close. The move comes close on the heels of the sharp improvement in India’s ranking in the World Bank’s ease of doing business survey.

Moody’s gives govt ammo to battle oppn

The ratings upgrade by Moody’s could position India as an attractive investment destination, apart from making it easier for companies to raise resources abroad. The ratings agency highlighted reforms such as the Goods and Services Tax (GST) and demonetisation, which it said would lead to greater formalisation of the economy. Besides upgrading India’s ratings, Moody’s also revised the outlook from positive to stable, indicating that the next upgrade might take a while coming.

“The government is midway through a wide-ranging programme of economic and institutional reforms. While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth,” the agency said.

The ratings action comes days ahead of the crucial Gujarat assembly elections where the opposition Congress has sought to portray GST and demonetisation as triggers for the slowdown. The Moody’s upgrade is expected to provide ammunition to the government to blunt criticisim about its handling of the economy after growth slowed to a three-year low of 5.7% in the June quarter and rollout issues linked to GST triggered a political backlash.

Industry, stock brokers and bankers said the revised rating would accelerate fund flow to the country. “This move will now give India access to cheaper capital funds for investment, helping accelerate growth,” said Shikha Sharma, MD & CEO, Axis Bank. So far India’s cohorts in the rating table were countries like South Africa and Indonesia. With this upgrade, India has moved into the same league as Italy, Spain, Oman and the Philippines.

Moody’s Upgrade Lifts Mood On D-St & Main St

Sensex Rallies Over 400 Pts Intra-Day

The sensex started the session almost at the day’s high, rallied over 400 points (1.2%) to an intraday high at 33,521. But, due to weekend profit-taking, it closed 236 points higher at 33,343. Market players interpreted Moody’s decision as an approval by the ratings major’s for the Narendra Modiled government’s reforms-oriented initiatives, which would put the country back on a strong economic growth path. The day’s rally added about Rs 1.7 lakh crore to investors’ wealth with the BSE’s market capitalisation now just a tad above the Rs 150-lakh-crore mark.

A section of the market believes that the Moody’s action has helped changed the mood on Dalal Street, but its impact would not last long. Jimeet Modi, founder & CEO, Samco Securities said that although Moody’s upgrade has helped a pull-back in the benchmark indices, this would prove to be short-lived as economic fundamentals have not changed. “China’s substantial reduction of rating from Aa3 to A1 did not lead to a fall in the markets. On the contrary, the stock market rose 20% since the downgrade. Therefore, the current upgrade should not be read into too much, it is merely a short-term sentiment booster,” Modi said.

Riding on reforms, govt cracked the code

‘Action Should Have Come A Year Earlier’

Several key serving and former policymakers said the upgrade should have been announced one year ago given the spate of reforms. “They always said they would like the reforms to take deep roots and the reforms are sustainable. From the department of economic affairs (DEA) we had written a letter pointing out what we considered as deficiencies in their rating methodology. They had of course replied,” former economic affairs secretary Shaktikanta Das who had spearheaded the effort told TOI.

“But the fact that reforms are deep rooted and sustainable are also a matter of subjective assessment. Now, subjective assessments can vary but at the same time our point was that subjective assessments are based on objective facts. Therefore, we felt India deserved a credit rating upgrade much earlier. It has to be recognised that without this rating upgrade India was attracting a lot of investments. Now with this upgrade, together with improved ease of doing business, India emerges as a very attractive destination,” said Das.

The 2016-17 economic survey had also questioned the rating methodology of the agencies and used the rating of China and India to point out the flaws. While it was pointing out the gaps, North Block mandarins, such as Das and CEA Arvind Subramanian realized that trying too hard with the agencies may not work and instead it is better to focus on the job at hand. “We do what we do,” Subramanian was overheard telling his colleagues in the finance ministry in the afternoon, in what was probably a take on Raghuram Rajan’s latest book ‘I do what I do’.

Former NITI Aayog vice chairman Arvind Panagariya pointed to flawed methodology that rating agencies pursue. “Of course, our ratings continue to be well below what they ought to be. We have no record of ever defaulting and we are among the fastest growing large economies. But the ratings agencies seem to attach a huge negative weight to our low level of percapital income,” he said.

“Nevertheless, while we must rejoice the rare event, we must also reaffirm our resolve to continue moving ahead with reforms to create the New India that the PM envisages by 2022,” Panagariya said. Economic affairs secretary Subhas Chandra Garg said the upgrade is a credible stamp of approval of deep and comprehensive structural reforms undertaken by the government to put India on a sustainable high growth and institutional development path.

N K Singh, a former civil servant and a member of the now-wound up Planning Commission, echoed the sentiment. “It is a very strong vindication going beyond recognition of the government’s overall economic strategy. This is not the result of a single measure but a constellation of measures which includes continued fiscal consolidation, convergence of fiscal and monetary policies, and continuous fine tuning of GST.”

International borrowings to be cheaper for India Industries

“Usually, rating upgrades are anticipated 30-60 days in advance and the effect of the change lingers on till 30-60 days after the event. However, in the current case, as the change in ratings by Moody’s was completely unanticipated, the decrease in yields might materialise in a short duration,” said HDFC Bank chief economist Abheek Barua.

In its earlier rating of Baa3, India’s peers included South Africa, Hungary, Indonesia, Kazakhstan and Romania. The borrowing costs for these companies ranged between 4.3% and 9.3%. The cohorts under the new rating of Baa2 include Spain, Italy, Philippines and Oman. The borrowing costs for these countries range from 1.5% to 4.9%.

Bank of America president and India country head Kaku Nakhate said, “This ratings upgrade will help India Inc’s future external borrowings becoming cheaper, which in turn will lead to higher investments in manufacturing and infrastructure sector.” Following the ratings upgrade, prices of bonds issued by Indian corporates rose in the international markets.

‘Upgrade shows reforms may boost growth’

Moody’s Investors Service vice-president (sovereign risk group) William Foster explains to TOI the rationale behind the ratings upgrade. Foster also sounds upbeat about India’s prospects, although he says the fiscal deficit could be wider than expected this year. Excerpts:

William Foster

VP (SOVEREIGN RISK GROUP), MOODY’S

What prompted the ratings upgrade?

How do you expect growth to pan out?

Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns. The reforms — aimed at improving the business environment, increasing formalisation of the economy or anchoring stable inflation — contribute to further enhancing the economy’s capacity to absorb shocks. We have revised our GDP growth forecast down to take into account the immediate impact of demonetisation and disruptions related to GST. We forecast real GDP growth to moderate to 6.7% in the year ending in March 2018. However, as disruption fades, we expect to see a rebound growth to 7.5% in the next fiscal year.

Will the reforms undertaken by the government be enough to tackle the problem in the banking sector and revive growth?

The recapitalisation of public sector banks announced last month should enable them to move forward with the resolution of NPLs (non-performing loans) through comprehensive write-downs of impaired loans and increase lending gradually. This represents a step forward in addressing a key weakness in India’s credit profile. Over the medium term, if met by rising demand for investment and loans, the measures will help foster more robust growth, in turn supporting fiscal consolidation.

When do you expect private sector investments to pick up?

Private sector investment has been weak, likely hampered by high corporate debt in investment-intensive sectors and ongoing challenges in the business environment and infrastructure gaps. Over time, measures implemented and planned such as GST removing barriers to trade within India, steps aimed at enhancing the business environment, encouraging foreign direct investment, providing greater visibility about future inflation will contribute to higher investment. Most of these measures will take time.

The FM has said that the fiscal glide path may be affected due to the structural changes India has undertaken. Do you think the fiscal deficit target for this year will be missed?

We forecast the general government budget deficit (state and Centre) at 6.5% of GDP this fiscal year, similar to the last two fiscal years. Lower government revenues than planned in the Budget and somewhat higher government spending could lead to a deficit somewhat wider than targeted. However, we think that the government’s commitment to fiscal consolidation remains. Over time, measures aimed at broadening the tax base and improving the efficiency of government spending will contribute to a gradual narrowing of the deficit. Together with robust and sustained nominal GDP growth, this would be conducive to a gradual decline in the government debt burden.

ENDORSES REFORMS

Moody’s upgrade is a hugely welcome endorsement of the govt’s reform policies, and the economy’s enormous potential. Key reforms will surely have large payoffs in the coming years. Economic cycle too is on an upswing

KUMAR M BIRLA | CHAIRMAN, AB GROUP

It’s a welcome development, but we also feel it was long overdue… it’s a recognition of the actions that the govt has undertaken. We also need to keep all these things in perspective

ARVIND SUBRAMANIAN | CEA

r s

Moody’s has noticed the seriousness of the government in carrying out the reforms like GST, which has been pending for 10 years. Some of these reforms are transformational

DEEPAK PAREKH | CHAIRMAN, HDFC

Borrowing costs are expected to come down for corporates. Banks are well poised to contribute to growth of economy. By January, some of the bad debt resolution plans should be in place

RAJNISH KUMAR | CHAIRMAN, SBI

A large part of capital allocation are ratings-led. It leads to lower credit premium for corporates and makes capital cheaper. Some more pension funds will now be able to invest in India

CHANDA KOCHHAR | MD & CEO, ICICI

It highlights the immense potential that India offers. More importantly, it also emboldens the government to stay true to the path of strong and transformational reforms

SUNIL MITTAL | CHAIRMAN, BHARTI ENTERPRISES

We believe private sector capital will still take some time to come back. The central & state governments and PSUs are expected to drive capital expenditure for another 9-12 months

S N SUBRAHMANYAN | CEO & MD, L&T

-Mumbai, 18 November, 2017

Moody’s lifts India’s rating to Baa2, outlook stable

Moody’s lifts India’s rating to Baa2, outlook stable

India’s sovereign rating has been upgraded by Global rating agency Moody’s Investors Services for the first time in 14 years, taking cognizance of the Centre’s ongoing reforms such as the new Goods and Services Tax (GST) regime and the mechanisms for resolving bad loans and re-capitalise ailing public sector banks.

“The decision to upgrade the ratings is underpinned by Moody’s expectation that continued progress on economic and institutional reforms will, over time, enhance India’s high growth potential and its large and stable financing base for government debt, and will likely contribute to a gradual decline in the general government debt burden over the medium term,” the rating agency said in a statement.

“In the meantime, while India’s high debt burden remains a constraint on the country’s credit profile, Moody’s believes that the reforms put in place have reduced the risk of a sharp increase in debt, even in potential downside scenarios,” Moody’s Investors Service said, to explain its upgrade for the Indian government’s rating as a local and foreign currency issuer from Baa3 with a positive outlook to Baa2 with a stable outlook.

Obligations rated Baa2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics. Baa3, by contrast, was the lowest investment grade rating.

For the government, the upgrade would be a fitting rebuttal to critics of its handling of the economy, coming on the back of India’s rise in the World Bank’s ease of doing business index, and as a culmination of years of efforts by officials to get global rating agencies to acknowledge India’s improved macro-economic situation.

While it acknowledged that some steps such as the GST and demonetisation have ‘undermined’ growth in the near term, Moody’s said it expects real GDP growth in India to moderate to 6.7% in 2017-18.

However, it stressed that the disruption effect of these reforms fade and the government helps small and medium enterprises and exporters with compliance issues under the new indirect tax regime, growth will rise to 7.5% in 2018-19 and similarly robust growth thereafter.

“Longer term, India’s growth potential is significantly higher than most other Baa-rated sovereigns,” the agency said. “While a number of important reforms remain at the design phase, Moody’s believes that those implemented to date will advance the government’s objective of improving the business climate, enhancing productivity, stimulating foreign and domestic investment, and ultimately fostering strong and sustainable growth,” it noted.  Moody’s

While it believes the reform programme will complement the existing shock-absorbance capacity provided by India’s strong growth potential and improving global competitiveness, Moody’s said they also offer greater confidence that the high level of public indebtedness which is India’s principal credit weakness will remain stable, even in the event of shocks, and will ultimately decline.

Basing its upgrade on the sustainable growth that reforms will trigger and the greater stability in government debt going forward, the rating agency also flagged the need for acting on other important measures ‘which have yet to reach fruition’ such as planned land and labor market reforms.

Moody’s expects India’s debt-to-GDP ratio to rise by about one percentage point this fiscal year to 69% of GDP, as nominal GDP growth has slowed following demonetization and the implementation of GST.

“The impact of the high debt load is already mitigated somewhat by the large pool of private savings available to finance government debt. Robust domestic demand has enabled the government to lengthen the maturity of its debt stock over time, with the weighted average maturity on the outstanding stock of debt now standing at 10.65 years, over 90% of which is owed to domestic institutions and denominated in rupees,” the agency said.

“The relatively fast pace of growth in incomes will continue to bolster the economy’s shock absorption capacity. And even in periods of relatively slower growth, as seen recently, stable financing will mitigate the risk of a sharp deterioration in fiscal metrics,” Moody’s noted.

Although the rating agency agreed that a lot remains to be done such as fixing the GST’s implementation challenges, weak private sector investment and the slow resolution of banking bad loans, Moody’s said it expects at least some of these issues to be addressed over time and will help further improve the Indian government’s effectiveness and overall institutional framework.

 -NOVEMBER 17, 2017

India’s GDP to grow next fiscal at 7.5 percent: Moody’s

India’s GDP to grow next fiscal at 7.5 percent: Moody’s

US agency Moody’s Investors Service on Thursday forecast for India a “stable GDP growth at around 7.5 percent in 2016 and 2017”, saying the country is relatively less exposed to external headwinds, like the Chinese slowdown, and will benefit from lower commodity prices.
India is relatively less exposed to external factors, including China slowdown and global capital flows. Instead, the economic outlook will be primarily determined by domestic factors, Moody’s said in its report “Global Macro Outlook 2016-17 – Global growth faces rising risks at time of policy constraint”.
“Together with Turkey and China among the G20 emerging markets, India benefits from lower commodity prices: In 2014, net commodity imports amounted to 5.9 percent of India’s GDP, compared with net exports worth 1.3 percent, 3.3 percent and 4.3 percent for South Africa, Brazil and Indonesia respectively,” it said on Thursday.
“In the five years to the end of the decade, we expect GDP per capita (at market exchange rates) to increase by 34 percent in real terms in India, compared with only 3.6 percent in the G20 emerging markets, excluding China and India,” the report added.
Instead, the American agency cautioned that India’s economic environment is constrained by “banks’ balance sheet repair and elevated corporate debt” and the corporate pricing power being constrained by the impact of two consecutive droughts on food price inflation and households budgets.
India’s economy is powered by sustained growth in consumer spending, fostered by moderate inflation, still favourable demographics and strengthening investment, in particular foreign direct investment, Moody’s said.
“The 23.55 percent increase in public sector salaries proposed by the 7th Pay Commission is worth 0.7 percent of GDP. It is not yet known how this proposal will be implemented but higher public sector wages will most likely contribute to strong consumption growth,” the report said.
“The pay increase will also probably raise inflationary pressures. However, we assume the government will cut spending in other parts of the budget to maintain the deficit broadly in line with the 3.5 percent of GDP objective, thereby mitigating some of the inflationary effects,” it added.
Moody’s said overall growth will fail to pick up steam over the next two years as the slowdown in China, lower commodity prices and tighter financing in some countries weigh on the economy.
The Indian economy grew 7.3 percent in the third quarter ended December 31, 2015 — down from the 7.7 percent expansion in the previous quarter, but marginally up over the 7.1 percent over the like period of last fiscal, official data showed last week.
Growth was pulled down by lower production in ‘agriculture, forestry and fishing’, ‘electricity, gas and water supply and other utility services’ and ‘financial, real estate and professional services’.
There was a 6 percent growth in electricity, gas, water supply and other utility services, as against 7.5 percent growth in the second quarter.
The government’s mid-year economic review, released in December, lowered the economic growth forecast for the current fiscal to the 7-7.5 percent range, from the previously projected 8.1-8.5 percent, mainly because of lower agricultural output due to deficit rainfall.

-18 February 2016 | IANS | Mumbai

Outlook for India’s power sector remains negative: Moody’s

Outlook for India’s power sector remains negative: Moody’s

Faced with challenges like fuel supply risks, cost overruns at private plants and financially weak discoms, India’s power sector outlook remains negative, says Moody’s Investors Service.
“Our outlook for the Indian power sector remains negative, because the industry faces persistent challenges, mainly resulting from high, albeit moderating, fuel supply risk, cost over-runs at some plants operated by independent power producers (IPPs), and the limited capacity to pay on the part of financially weak distribution utilities,” Moody’s said in a press release today.
 
Some independent power producers (IPPs) are also locked into power purchase agreements (PPAs) that have become unviable because they do not allow the high costs of imported fuel to be passed through, it said.
Indian power generators’ capacity utilisation will likely be limited by the financial weakness of offtakers, in turn constraining off-take electricity demand, despite growing electricity demand and increasing domestic coal, it added.
For India’s NTPC, its unfavourable business conditions are offset by the Indian central and state governments’ and the Reserve Bank of India’s standing agreement to offset high offtaker risk, and the company’s well secured fuel supply sources from domestic and overseas markets.
Low commodity prices will benefit Indian IPPs by making power more affordable for offtakers. However, the offtakers’ weak financial profiles pose a risk to timely payments to IPPs under PPAs.
Meanwhile, the high offtaker risk in India will not be addressed over at least the outlook period (next 12-18 months), as the financial profiles of offtakers will remain weak. Some state governments have also not paid all subsidies that the distribution utilities are entitled to; thereby constraining the utilities’ liquidity positions.
The long-term viability of the IPPs remains uncertain, without timely tariff compensation.
“India’s coal-based power generators will eventually carry additional environmental risk stemming from concerns over the future availability of ground and river water for power generation. As a result, we expect that these generators will see a gradual increase in capex to secure water, to avoid a decline in capacity utilization rat,” it said.
Moody’s stable outlook for the power sector in Asia Pacific (ex-Japan) is underpinned by steady demand, low input costs for most countries and transparent tariff mechanisms for some countries.
“Steady demand for electricity in most countries in the region, and low input costs under stable market structures will allow most power companies to recover capex and maintain adequate financial buffers,” said Mic Kang, a Moody’s Vice President and Senior Analyst.
-03 December 2015 | PTI | New Delhi