Fitch Says Further India Fiscal Weakness Would ‘Weigh’ on Credit Rating
Fitch Ratings said that any further deterioration in Indian government finances may “weigh” on the nation’s debt ratings, even though last week’s decision to increase the annual borrowing plan was expected.
The finance ministry’s plan to boost debt sales by 32 percent in the next six months means it will miss a target to cut the budget deficit to 4.6 percent this fiscal year, said Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereign ratings at Fitch. The shortfall may widen instead to 5.5 percent in the 12 months through March, from 4.7 percent in the previous year.
India is borrowing more even as sovereign-debt problems in Europe and the U.S. threaten a recession in developed markets. Yields on the nation’s 10-year bonds touched a three-year high of 8.52 percent today after climbing 60 basis points since the end of 2010 in the biggest increase among Asian bond markets. Government debt as a proportion of gross domestic product may still decline, according to Fitch, as the country grows at the fastest pace after China among major Asian economies.
“We already expected the 4.6 percent deficit target to be missed but if we saw further weakening in the fiscal outlook, then that would weigh on the ratings,” said Colquhoun. “We still think the debt-to-GDP ratio will be coming down because of the strength of the nominal GDP growth. The announcement of extra borrowing is what we would’ve expected to happen.”
India’s BBB- rating by Fitch, the lowest investment grade, is currently “well supported” with a stable outlook, he said. Fitch cut India’s economic growth rate for the year ending March 31 to 7.5 percent from 7.7 percent, citing “deterioration” in global growth prospects, according to an e-mailed statement today. The growth forecast for next fiscal year was reduced to 8 percent from 8.2 percent.
The country’s $1.7 trillion economy expanded 7.7 percent in the three months ended June from a year earlier, the slowest pace since 2009, a government report showed Aug. 30.
The government said Sept. 29 that it will raise 2.2 trillion rupees ($44.5 billion) selling bonds in the second half of the current fiscal year, compared with an earlier target of 1.67 trillion rupees. Finance Minister Pranab Mukherjee said in New Delhi the next day that it’s “too early” to judge the impact of the extra borrowing on the government’s fiscal deficit goal.
India’s decision to issue more debt is “not surprising” and is “within the scope of expectations,” said Takahira Ogawa, Singapore-based director of sovereign and international public finance ratings at Standard & Poor’s. The nation’s budget deficit in the fiscal year ending March 31 will be wider than the government’s estimate of a four-year low of 4.6 percent, he said in an e-mail today.
“To maintain the market’s confidence, it is becoming more important for the government to show its commitment to fiscal consolidation in the medium term,” Ogawa said. “The content and timing of enactment of next year’s budget will be very important factors for India’s sovereign rating.”
Accelerating inflation and a record surge in interest rates may deter some companies from making long-term investments in India, according to Fitch.
The Reserve Bank of India raised borrowing costs 12 times since the start of 2010, the fastest monetary-tightening in the country on record, to cool inflation. Still, the benchmark wholesale-price index rose 9.78 percent in August, the fastest pace in more than a year. RBI may still need to tighten monetary policy to curb prices, Fitch said in the statement.
“More volatile interest rates and more volatile economic conditions, including on the inflation front, tend to discourage businesses from committing to long-term capital-spending projects,” Fitch’s Colquhoun said. “That sort of uncertainty over the coming medium-term macro prospects is what has weighed on investment and thereby contributed to weakening GDP growth.”
This year’s slide in the rupee may make India’s exports more competitive and help narrow the nation’s current-account deficit, he said. The rupee lost 9.1 percent so far in 2011 to 49.1575 per dollar at the 5 p.m. close in Mumbai, the worst performance among Asia’s 10 most-traded currencies.
“A cheaper rupee would benefit India’s exporters relative to other countries at least in the short term,” Colquhoun said. “This should help to cut the current-account deficit.”
The shortfall in the current account, the broadest measure of international trade and investment flows, widened to $14.1 billion in the three months through June from $5.4 billion in the previous quarter, the RBI said on Sept. 30. The median forecast of eight estimates in a Bloomberg News survey was for a $10.75 billion deficit.
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