Fitch may downgrade India’s sovereign rating
Economic Times, February 2, 2010, Page 14
Widening Fiscal Deficit Has Rating Agency Worried
Our Bureau MUMBAI
GLOBAL ratings firm Fitch has said it may downgrade India’s sovereign rating if the country’s fiscal deficit worsens. The rating agency has, however, retained its current local and foreign currency ratings.
Addressing the media in a teleconference, Andrew Colquhoun, director in Fitch’s Asia-Pacific Sovereign Group, said: “If we see further slippages in the Budget for FY11, that will encourage us to take (a ratings) action. Besides the fiscal position, Mr Coloquhom has also expressed concerns about India’s low ratings in World Bank’s governance indicators and also poor physical infrastructure. “Structural reforms aimed at tackling these weaknesses would support economic prospects and strengthen the sovereign credit profile,” he said.
In a statement issued on Monday, Fitch affirmed India’s long-term foreign and local currency ratings at ‘BBB-’, the lowest notch in investment grade, indicating adequate repayment capacity. Any future downgrade will tip India into the speculative grade category. While the outlook on its foreign currency bond rating is stable, that on longterm local currency rating is negative. The short-term foreign currency ratings at ‘F3’ also is the lowest notch investment grade rating, reflecting adequate repayment capacity. “Fitch regards the deterioration in India’s public finances since 2008 as partly structural, putting negative pressure on the local currency rating that will require substantive fiscal reform to redress,” Colquhoun said in a release. Fitch has also said the foreign currency ratings remain well-supported by foreign investment prospects and by the world’s sixth-biggest stockpile of foreign reserves.
India’s general government budget deficit rose in April-March 2009 (FY09) to 11.6% of GDP, from 6.4% a year earlier, on account of a combination of factors including the stimulus package of tax cuts and subsidies to contain high commodity prices, among others.
“The abandoning of the Fiscal Responsibility and Budget Management Act (FRBM 2003) leaves India without a credible fiscal framework to constrain policy and reduce its debt ratios”, it said.
Against this backdrop, the FY11 Budget and the report of the Thirteenth Finance Commission, both expected at end-February, will be important fiscal-policy statements. The Thirteenth Finance Commission was mandated to consider fundamental revenue-side reforms, including introduction of a goods and services tax, and to recommend a new deficit-reduction framework.
Notwithstanding fiscal weakness, the Indian economy continues to perform strongly, supporting the ratings. GDP growth is expected at 6.4% for FY10, strengthening to 7% in FY11. Global recovery supports India’s near-term economic prospects, with exports growth turning positive in November 2009 (+18% year on year).
Economic Times, February 2, 2010, Page 14
Widening Fiscal Deficit Has Rating Agency Worried
Our Bureau MUMBAI
GLOBAL ratings firm Fitch has said it may downgrade India’s sovereign rating if the country’s fiscal deficit worsens. The rating agency has, however, retained its current local and foreign currency ratings.
Addressing the media in a teleconference, Andrew Colquhoun, director in Fitch’s Asia-Pacific Sovereign Group, said: “If we see further slippages in the Budget for FY11, that will encourage us to take (a ratings) action. Besides the fiscal position, Mr Coloquhom has also expressed concerns about India’s low ratings in World Bank’s governance indicators and also poor physical infrastructure. “Structural reforms aimed at tackling these weaknesses would support economic prospects and strengthen the sovereign credit profile,” he said.
In a statement issued on Monday, Fitch affirmed India’s long-term foreign and local currency ratings at ‘BBB-’, the lowest notch in investment grade, indicating adequate repayment capacity. Any future downgrade will tip India into the speculative grade category. While the outlook on its foreign currency bond rating is stable, that on longterm local currency rating is negative. The short-term foreign currency ratings at ‘F3’ also is the lowest notch investment grade rating, reflecting adequate repayment capacity. “Fitch regards the deterioration in India’s public finances since 2008 as partly structural, putting negative pressure on the local currency rating that will require substantive fiscal reform to redress,” Colquhoun said in a release. Fitch has also said the foreign currency ratings remain well-supported by foreign investment prospects and by the world’s sixth-biggest stockpile of foreign reserves.
India’s general government budget deficit rose in April-March 2009 (FY09) to 11.6% of GDP, from 6.4% a year earlier, on account of a combination of factors including the stimulus package of tax cuts and subsidies to contain high commodity prices, among others.
“The abandoning of the Fiscal Responsibility and Budget Management Act (FRBM 2003) leaves India without a credible fiscal framework to constrain policy and reduce its debt ratios”, it said.
Against this backdrop, the FY11 Budget and the report of the Thirteenth Finance Commission, both expected at end-February, will be important fiscal-policy statements. The Thirteenth Finance Commission was mandated to consider fundamental revenue-side reforms, including introduction of a goods and services tax, and to recommend a new deficit-reduction framework.
Notwithstanding fiscal weakness, the Indian economy continues to perform strongly, supporting the ratings. GDP growth is expected at 6.4% for FY10, strengthening to 7% in FY11. Global recovery supports India’s near-term economic prospects, with exports growth turning positive in November 2009 (+18% year on year).
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