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Moodys Downgrades India’s Credit Rating Higher Than “Junk”

 


Movements have been on the cards for a while, but on Monday, global rating agency Moody’s Investors Service formalized it – lowering India’s sovereign credit rating, hit by coronaviruses, to a notch above speculative or unwanted status.

The Baa2 rating – the lowest investment rating – of ” Baa3 ” was accompanied by the warning that the country’s financial outlook remained negative.

Moodys, who had the highest rating on India among the top three international rating agencies, said the negative outlook reflects dominant, mutually reinforcing downside risks due to deeper tensions in the economy . The agency was referring to the deep slowdown in GDP growth and the rapidly deteriorating fiscal position of cash-strapped governments.

The big concern now is that the negative outlook for India will open the door to further degradation that would leave the country in unwanted territory, making international fundraising much more difficult. Unwanted status slows business in a country and increases the cost of borrowing for business and government.

Moodys said in his statement that the coronavirus pandemic has exacerbated the vulnerabilities of India’s credit profile. This is a very important point from Moodys, be prepared for an even bigger mess, said former Yashwant Sinha, who was finance minister in the BJP government led by Atal Bihari Vajpayee and who was a staunch critic of administration of Prime Minister Narendra Modis.

Back in what had been a welcome boost to the government’s economic reform program and to attract foreign investment, Moodys had improved India’s credit rating by a notch to Baa2 stable compared to Baa3 positive after the government has adopted the historic Goods and Services Tax (GST). Moodys’ latest share carries its rating on India to the same BBB- rating assigned to the country by S&P Global Ratings and Fitch Ratings Ltd.

The downgrade follows official data from Friday showing that economic growth in India had slowed to 3.1% in the first three months of this year from a year earlier, the lowest pace in 11 years . Figures that barely incorporated a week of the impact of the national lockdown that went into effect on March 25 are expected to worsen with an economy expected to contract by as much as 7% in fiscal year 2020-2021. It would be the first time that the Indian economy has shrunk in four decades. As a reminder, five years ago during the 2015-2016 fiscal year, the Indian economy accelerated by 8.3% over one year.

More optimistic than some other forecasters, Moodys said he expected India’s GDP to contract 4.0% in the current fiscal year due to the shock caused by the coronavirus pandemic and associated lock-out measures. He forecast that the economy would rebound to grow 8.7% in the following year and about 6% in the following years – significantly less than in the past, due to continued weakness in sector investment private sector, lukewarm job creation and a weak financial system.

India is facing a long period of slowing growth, growing debt that will make the country more expensive to borrow money and persistent tensions in parts of the financial system, said Moodys. The central bank and the government will have to work hard to mitigate and contain these challenges in the wake of the coronavirus pandemic, the agency added.

On Monday, India recorded its largest increase in a day – 8,392 new cases – in Covid-19 infections. India is now the seventh most affected country in the world with 190,500 cases and 5,394 deaths. The latest figures came at the time when India started its 1 phase unlock opening which allows most activities across the country.

Before the coronavirus pandemic, Moodys said the public debt-to-GDP ratio was calculated at 72%, but this year the numbers are expected to climb to 84% of GDP. While India’s debt-to-GDP ratio has traditionally been higher than its peers, the agency noted that it is now actually 30 percentage points higher than that of other middle Baa countries.

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