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Global rating agency Moody’s on Wednesday said that the reforms in India may lose steam in 2018 ahead of the Parliamentary elections slated for 2019.
A busy election schedule will slow reform momentum in some Asia Pacific economies. In Indonesia and India, regional elections are also likely to slow down any reform momentum. Both countries also have parliamentary elections in 2019, the rating agency said in outlook for sovereign creditworthiness in Asia Pacific in 2018. In the normal course, the elections for Lok Sabha (lower house of Parliament) are expected to be held April-May 2019.
Moody’s had upgraded India (Baa2 stable) in mid-November to reflect the expectation that continued progress on economic and institutional reforms will, over the time, enhance its growth potential. The reform will be beneficial for large domestic financing base and contribute to a gradual decline in the general government debt burden.
Moody’s said emerging markets' investment and fiscal reforms have a greater impact on a favourable growth environment. The supportive macroeconomic environment in 2017 has allowed a number of governments to implement policy reforms and amplified the credit-positive impact of such reforms.
While reforms will continue, they are unlikely to be sweeping in nature because the window of opportunity is gradually closing ahead of elections in 2018 and 2019 in a number of countries.
Many of these reforms have been geared towards improving the investment environment like in the case of Indonesia and India. The recent implementation of a goods and services tax (GST) in India complements other measures to foster a greater formalization of the economy and supports the broadening of the tax base, it said.
Rating actions over the past year suggest that support for credit profiles remains strongest when the export upturn combines with reforms and infrastructure investment, as is the case in India and Indonesia for instance.
Moody's outlook for sovereign creditworthiness in Asia Pacific (APAC) in 2018 is stable overall, on the expectation that the fundamental credit conditions that will drive sovereign credit over the next 12 to 18 months. This favourable growth environment will amplify the credit benefits of past reforms and encourage some sovereigns to implement further measures, particularly in emerging markets. However, leverage remains a credit constraint.
India and China remain the fastest-growing economies in the region. A gradual moderation in growth in China and a temporary slowdown in India will be balanced by robust trends in other Asian economies. Also, there are pockets of legacy debt, corporate debt-at-risk persist in India, Indonesia and Korea. In India and Indonesia, a significant proportion of firms are vulnerable to interest rate shocks and fluctuations in exchange rates.
An analysis of corporate sector balance sheets by the US Federal Reserve suggests that China, India, Indonesia and Korea stand out as countries in which a stress situation – particularly one related to earnings, interest rates or the exchange rate – would cause corporate debt levels to rise to high levels as a share of Gross Domestic Product (GDP), Moody's added.