Country risk: India upgrade is long overdue

Show of hands: ECR experts believe India has something to celebrate

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In February, at the launch of the Organization for Economic Cooperation and Development’s (OECD) latest report on India, its secretary-general Angel Gurria stated credit rating agencies had become too conservative in failing to upgrade India’s credit rating.

That assertion is endorsed by a gradually improving ECR risk score over the past three years.

Indeed, on close inspection India’s risk is barely discernible from the Philippines or Thailand, both of which command higher sovereign ratings.

Although Moody’s has its rating on a positive outlook, unlike Fitch and S&P, which are both stable, all three agencies have stuck to their assessment of Indian creditworthiness, placing it on the lowest of investment grades (BBB-/Baa3). 

However, India ranks 55th out of 186 countries in Euromoney’s global risk rankings, climbing 10 places in the past three years

It is now firmly within the third of five tiered categories equivalent to a BB+ to A- rating, giving scope for an adjustment.

Thailand, two places higher in the rankings, but less than one point better off, is two notches higher on BBB+/Baa1.

The Philippines, although ranking BBB- by Fitch, is a safer credit (assessed as Baa2/BBB) claim Moody’s and S&P, despite the fact Philippines is just below India in Euromoney’s rankings.

The score differential is tiny, and the two are broadly equivalent risks.

Strong justification

Part of the problem, OECD’s Gurria believes, relates to the fact India does not market itself appropriately.

He has a point.

India is growing faster than China, despite some forecasters downgrading their estimates slightly to allow for the disruption caused by the currency ‘clean-up’, when the authorities removed large denomination banknotes from the economy to combat graft.

However, India rarely blows its trumpet and investors can often overlook its attributes.

The country is growing at around 7% per annum, with some expectation this will rise to 7.5% this year, supported by monetary policy easing in 2016 leading to a 50-basis-points reduction in the Reserve Bank of India’s (central bank) key policy interest rate to 6.25%.

There are always inflation concerns, but none too perplexing, and an overriding positive is that India has combatted its external deficit problems.

The current-account deficit shrank to $3.4 billion (0.6% of GDP) in the third quarter of 2016. That compares with a deficit of $8.5 billion (1.7% of GDP) in the same period of 2015.

Underlying it, the merchandise (goods) trade deficit narrowed by almost a third to $25.6 billion, and with solid capital inflow supporting the rupee, an overall balance of payments surplus was recorded.

Consequently, India’s risk factor score for the economic-GNP outlook, while broadly on a par with the Philippines, greatly exceeds Thailand’s.

Other macro-indicators are lagging, but it is on political risk where India outperforms its peers in areas such as transparency, institutional risk and government stability.

Madan Sabnavis, an economist at Credit Analysis and Research, states that “government policies in the past three years have focused on progressive policies in a transparent manner: the goods and services tax, focus on skills, rationalization of subsidies, better delivery mechanisms and thrust on infrastructure besides fiscal prudence.

“The power sector in particular is going through a radical transformation with a scheme called UDAY that restructures the debt of the distribution companies,” he says.

As with other contributors to the survey, Sabnavis talks up India’s external strengths, its current account, foreign-exchange reserves and solidly performing currency.

In his opinion, these and other factors have led to a sustained performance during the past three years which “calls for an upgrade”.