That rating agencies, often enough, are more conservative while rating a developing economy than doing the same for a developed western economy was reiterated, not in so many words though, by India’s Economic Affairs Secretary Shaktikanta Das. Das felt that the decision of S&P not to upgrade India’s rating called for “introspection” on the part of the rating agencies. S&P maintained the lowest investment grade rating of ‘BBB-‘ with a ‘stable’ outlook for India. It cited India’s sound external profile and improved monetary credibility but advocated more efforts to lower government debt to below 60 per cent of the GDP. S&P also did not expect revenues to raise enough to meaningfully lower the deficit over the medium term. What is more, S&P said, “The outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts.”
According to Deepak Talwar Principal of DTA Consulting there is elements of truth in what Das said.
SBI Analysis on Rating Bias
A couple of months back India’s largest bank State Bank of India’s Economic Research Department did a detailed analysis of the foreign currency long-term sovereign ratings given by three major rating agencies, namely S&P, Moody’s and Fitch, for a group of 20 countries for the decade ended 2015. The research team constructed a rating migration matrix for the entire period. The rating migration matrix summarized changes in sovereign credit ratings over the given time horizon across different rating grades. The idea was to understand how liberal rating agencies are in terms of rating upgrades and downgrades.
Deepak Talwar drew attention to this, “The results were an eye opener.” It was found that the countries with the highest rating (AAA) have the greatest probability of retaining the same rating (96 per cent), even though these have witnessed considerable turmoil during 2006-2015. Developed nations fall into this category and it seems that in the absence of creation of new havens of certainty, the rating agencies have kept their rating constant so that the system is not destabilized further. One may recall that the rating agencies faced severe criticisms when they rapidly downgraded Eurozone countries owing to the Euro debt crisis. Agencies, it was said, were adding fuel to fire.
Despite attention to the emerging economies in the public domain (countries in the range A- to BB+) their ratings have not changed much even after improvement in their macroeconomic performance. A case in point is India, which has remained stuck in BBB- category despite its better performance relative to other emerging market economies.
India’s growth was affected during the global crisis of 2008 but the economy showed resilience and recovered soon after. Since 1992, on a net basis (upgrades adjusted for downgrades) India has witnessed only a solitary rating upgrade. In 1998 India was downgraded from BB+ to BB even though growth rate was high by 200 basis points. Reason unstated was Pokhran blasts. Subsequently, India was upgraded to BB+ in 2005 and BBB- in 2007. As per the SBI study with BBB- rating India has only a five per cent probability of a rating upgrade.
The unavoidable conclusion is that the rating agencies adopt different criteria while rating a country as is evident from the SBI study of the changes in ratings of developed and developing countries. The developed countries have occupied the top notches and have hardly seen any downgrades despite slippage in macros. In contrast, the developing countries have witnessed larger number of downgrades accompanied by fewer upgrades and that too in the lowest brackets
Views of Rating Agencies
Das has reasons to feel unhappy with the S&P bias. In this S&P is not alone. In September, Moody’s, had said that a ratings upgrade for India would not be possible before the next couple of years. This was just ahead of the agency’s representatives meeting finance ministry officials. Indian policymakers were miffed at Moody’s making such statements even before meeting them. Das had told the representatives that he had serious concerns regarding the agency’s methodology. He told them that, under the circumstances, the meeting was “completely irrelevant and superfluous”.
S&P in its latest rating exercise expects Indian economy to grow 7.9 per cent in 2016 and eight per cent on an average over 2016-2018. It also expects current account deficit to be at 1.4 per cent of the GDP in 2016 and the Reserve Bank of India to meet its inflation target of five per cent by March 2017. But the agency was stuck at Government debt stuck at 69% of GDP, higher than 60% ceiling the agency holds as sacrosanct.
Recent Economic Performance
Deepak Talwar pointed out that the performance of India tells a different story than the rating agencies stick to. Early results from 510 corporates, however, indicate that growth is coming back after seven consecutive quarters of decline. It seems that increased demand for products ahead of the festival season, the Pay Commission hikes and a good monsoon are helping corporate India’s fortunes. However the large companies have yet to come out with their results.
In addition the Nikkei India Manufacturing Purchasing Managers’ Index has hit a 22-month high. There has been higher auto sales in October. All these indicate better prospects for the economy. What is more, the core sector grew 5 per cent in September 2016, up from the 3.7 per cent in September 2015. Add the falling inflation and recent RBI interest rate cuts and rise in non-food credit there are reasons for positive sentiment.
The decision of the rating agencies to keep India’s rating unchanged and also just one notch improvement in the World Bank’s Ease of Doing Business Index (from 131 to 130) are two dampeners to the mood of the Government. Evidently India needs to work further and wait longer to win over the external judges to certify the good works done.