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Currency bonds remain below investment grade

Currency bonds remain below investment grade
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First Published: Tue, Aug 07 2007. 12 10 AM IST
Updated: Tue, Aug 07 2007. 12 10 AM IST
India’s local currency bonds will keep a non-investment rating as the government isn’t reducing its budget deficit fast enough, Moody’s Investors Service said.
The rating “remains constrained” at Ba2, two notches below investment grade and at the same level as Armenia and Jamaica, as state debt equal to three-quarters of the economy “leaves public finances vulnerable,” Moody’s lead sovereign analyst for India, Aninda Mitra, said in an email.
The comments contrast with credit-rating increases from Moody’s for China and South Korea in the past fortnight, due to their expansion and rising foreign reserves. A lower credit assessment for India will keep its borrowing costs high and impair the investments needed to boost growth and reduce poverty in the country.
“It’s important for India to get its local currency credit rating up to boost infrastructure spending and lift growth,” said Michael Preiss, an associate director at HSBC Holdings’ investment advisory group in Dubai. “India’s infrastructure funding is best met by rupee borrowings to prevent asset-liability mismatches from currency depreciation.”
The government plans to spend as much as $450 billion (Rs18.2 trillion) by 2012 to build new roads, sea ports, airports, railways and power stations and accelerate economic growth to 10%, from an average 8.6% in the past four years.
Inadequate capacity in power and other infrastructure shaves two percentage points from the country’s economic growth, the finance ministry estimates. Capacity addition of electricity in the past five years, for example, was less than 57% of the target, taking the peak power deficit to an eight-year high in the fiscal year ended 31 March, according to the central bank.
Moody’s raised China’s long-term foreign-currency rating by one level to A1, the fifth highest ranking, on 26 July, buoyed by $1.3 trillion of foreign reserves that shield the economy from overseas slumps. China’s local-currency debt was also assigned A1, seven notches above India’s. China’s economy grew 11.9% in the second quarter.
South Korea’s long-term foreign- and local-currency credit ratings were raised to A2 on 25 July as the economy grew at the fastest pace in 18 months in the quarter ended 30 June.
Standard & Poor’s raised India’s local-currency debt rating by a notch to BBB-, the lowest level on investment grade, on 30 January, after assigning a non-investment rating since September 2002. It has a BBB- rating on India’s foreign-currency debt rating.
Moody’s has kept India’s local-currency debt rating at par with Fiji, and a notch lower than Guatemala and Azerbaijan, retaining the Ba2 assigned since June 1998. It rates India’s foreign-currency debt Baa3, the lowest level in the investment grade, as India’s foreign exchange reserves rose to a record $225 billion, or almost a quarter of the economy.
“Although external accounts continue to show improvements, it is hard to envisage widening the existing two-notch gap between the existing foreign currency bond rating and the local currency bond rating,” Moody’s Mitra said. “The deficit reduction is encouraging, though not yet fast enough to bring the overall deficit-GDP (gross domestic product) ratio and the debt-GDP ratio in line with those similarly rated countries in the foreseeable future.”
The Reserve Bank of India expects India’s total debt, of both the Union and state governments, to decline to 74.2% of GDP in the year ending 31 March, from 77% in the previous year. The combined federal and state budget deficit may fall to 5.3% of GDP from 6.2% of GDP in the same period.
Still, Mitra said the Indian Union government’s interest payments account for 27% of its revenue, and this “leaves public finances vulnerable to unforeseen growth shocks, though we are comforted by the negligible share of foreign currency denominated debt in total government debt.”
Concerns about growing debt prompted the Union government in July 2004 to enact a law that makes it mandatory to cut its central budget deficit by 0.3% of GDP annually until 2009. The government forecasts the deficit will decline to 3.3% of GDP in the year to 31 March, and to the targeted 3% of GDP by March 2009.
Finance minister Palaniappan Chidambaram had said last month that tax revenue is buoyant as rising investments and consumption propel the economy to growth of more than 9% for the third year ina row.
“When the fiscal responsibility law was legislated, the trend growth was regarded as being around 7-8%,” Mitra said. “Consequently, with actual GDP growth having exceeded 9% for several years in a row, we think that fiscal consolidation could have proceeded faster.” Bloomberg
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First Published: Tue, Aug 07 2007. 12 10 AM IST