India still a crumbling Bric as China strengthens: ECR Q3 2013

India, waning due to its political uncertainties, lagging reforms, slow growth and currency weakness boosting debt (see CEIC whitepaper Rising Debt, Falling Confidence), is in danger of dropping below Russia to narrow the gap to Bangladesh, Pakistan and Sri Lanka – all higher risk countries in the region.

India’s score has been falling consistently in recent years, belying its stable, lowest triple-B credit ratings from Fitch and Moody’s; S&P has it more appropriately on negative. The IMF’s latest World Economic Outlook sees it growing at a subdued 3.8% this year, a second successive year below 4%.

If all goes well, the economy will pick up next year, but at half the pace witnessed in 2010, assuming that measures taken to protect the currency – raising interest rates, for example – do not have a more damaging impact. India’s current-account deficit, meanwhile, will be more than 4% of GDP in 2013 for a third successive year.

Maritza Cabezas, one of ECR’s experts working in macro research at ABN Amro, says: “There has been a moderation in the current-account deficit, but it is still not at acceptable levels.

“Higher wages, low productivity and an uncertain business climate have made the export-driven manufacturing sector less competitive.”

Foreign institutional investor outflows, steered by waning optimism concerning the Indian government’s policy measures to boost foreign direct investment, have prompted currency depreciation and a fall in reserves.

By contrast, China, Russia and South Africa have all seen their risks subside since June, meaning India (59th in the global rankings), could soon fall below Russia (60th). Only China, now the safest of the five Brics, has a higher score compared with the beginning of this year, as fears surrounding its banking sector and economic slowdown have calmed and its risk profile receives support from the sustained external surplus (see: China forecast 2013-2015).

China’s risks have eased on account of better economic figures, action taken to address corruption, central bank policy to provide sufficient short term liquidity and announcements by top officials clarifying the government’s reforms.

Xiolai Ping at ICBC China, a firm that contributes to ECR’s survey sums up by stating: “China's economy is going in the right direction. The government is well aware of the issues accumulated during the fast growing period and is working on them.

“The market is expecting more encouraging reform policies unveiled at the party’s forthcoming national conference.”   

Still, as the chart (below) demonstrates, China’s sub-factor scores present a nuanced picture of its risk profile. The sovereign beats India on most counts – for all indicators except institutional risk, transparency and bank stability – as well as Russia, again beaten only on transparency, but its advantages over Brazil are less clear.

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