S&P REMAINS “MOODY”

By Ruma Dubey

Expectations were running high. After the Moody’s upgrade last week, today was “Standard & Poor’s” day. Most were 100% certain that they would upgrade and give another booster to the markers next week.

Well, that did not happen. S&P maintained a status quo. It kept the outlook on India unchanged at stable. The rating stands at BBB-.

So what S&P has been doing for the past decade is that it has stuck to its BBB- rating, which incidentally in the lowest investment grade for bonds; just one grade above being labelled as junk. But the outlook has been doing a flip flop; it was at “stable” in 2007, which became “negative” in 2009 and then again “stable” in 2010. Once again in 2012, the outlook was brought down to “negative” and then again “stable” in 2014.

So as of now, S&P rating conveys that nothing really has changed much since 2014; it wants to wait and watch for GST, RERA, recapitalization and all measures to start bearing fruits. In fact this should not come as surprise at all because in Nov 2016 itself, S&P had categorically made a statement that it will not be doing any upgrade for two years, 2017 and 2018, even if there reforms were ushered in and there was a sense of political stability. Thus, not only this year but even next year, S&P’s stance will remain the same.

Maybe next year, S&P might need to have a relook at its statement if GST stabilizes, banks do get over NPAs, debt situation gets better and economic growth starts showing signs of robustness. Actually, next year will be a year of great push for reforms as it is the year preceding 2019 – the election year.

S&P had said then and it sent the same message across this time too – it wants to see more concrete action from the Govt to lower its debt to below 60% of GDP. It also does not expect revenues to rise enough to lower the deficit.

In today’s statement, S&P says, “Sizable fiscal deficit and high government debt detracts from sovereign credit profile, while fiscal gap is in line with expectations.” It said that it has a favourable view of the reforms and also appreciated Govt’s efforts to consolidate the fiscal deficit.

The big question dogging everyone’s mind – If Moody’s could upgrade why not S&P? So whose rating does one follow? Actually both have lauded India’s efforts and both have accepted the fact that it is moving in the right direction to rein in fiscal deficit. S&P in that sense seems stricter as it wants the entire picture to become alright while Moody’s has upgraded in anticipation of a better future management of fiscal and debt. So S&P is more cautious while Moody’s has been optimistic.

Historically too rating agencies have been following inconsistent policies; so this does not come as a surprise. The other rating agency, Fitch too is expected to announce its India rating. After S&P, hopefully expectations will be tempered and no buildup like the one today will happen.

There is no denying the truth that India has one of the highest general government debt-to-GDP levels at 68% among emerging market sovereigns. That needs to be corrected for all rating agencies to be consistent.

Also remember– depending so much on rating agencies is not prudent; Many blame the entire 2008 financial crisis on rating agencies. All over the world, people had questioned their ­­­­integrity– how could they have granted triple A ratings to mortgage based financial securities even when the housing markets had collapsed. It was crystal clear to all that these rating agencies had misrepresented the true credit risk, keeping their own selfish interests in mind. Otherwise how do these agencies explain the fact that all these “Triple A” rated issues were in default within a year of this rating? At that time itself, it was clear that these rating agencies were actually at the heart of the entire financial collapse. But over a period of time, people got busy trying to save their homes and jobs and this got buried deep.

And to think that we Indians and the Indian Govt are worried about what S&P and Moody’s or Fitch rates us? But the good part here in India is that at least that fear of “international image” keeps the the Govt working.