Stalled reforms tilt credit risks to the downside: T K Ogawa

Interview with Credit Analyst and Sovereign Ratings Director, S&P

While India pitched for ratings upgrade, Standard & Poor's (S&P) last month warned it of  downgrading its sovereign grade to junk if steps are not taken to reverse a slide in economic growth. India said the rating agency has failed to take note of reforms initiated since September last year and hoped that its ratings would instead be upgraded. S&P credit analyst and sovereign ratings director T K Ogawa tells Indivjal Dhasmana there are chances of upgrading outlook on rating, but did not commit to revision in rating itself. Edited interview

 

 

1) While you have threatened to downgrade India's ratings to junk in a year's time if slowdown in growth is not reversed, India has pitched for rating upgrade. What is your assessment of India's demand?

 

Standard & Poor’s affirmed India’s credit rating at BBB- with a negative outlook in May, 2013. The negative outlook signals at least a one-in-three likelihood of a downgrade within the next 12 months. We may revise the outlook to stable if the government carries through with its plans to unleash public and private investments (for example, by enacting a regulation for more practical and effective land acquisition), to implement nationwide government sales tax (GST), or to further trim fuel and fertilizer subsidies. We believe these measures could restore India's robust growth, and thereby ameliorate its public debt trajectory.

 

 

2) India has said S&P did not take into account reform measures initiated since September 2012 to put it on a warning over rating downgrade. Do you agree?

 

We continuously review ratings.  That is part of the surveillance process. We take into account numerous factors based on our globally consistent and publicly available criteria based on the following key factors:

 

Institutional effectiveness and political risks, economic structure and growth prospects, external liquidity and international investment position, fiscal performance and flexibility, as well as debt burden and monetary flexibility.

 

As noted in our latest report, we see signs of improvement, however, risks to India's credit growth from stalled reforms in parliament still tilt the credit risks to the downside.

 

3) There are stark differences between the approach of S&P and its peer Moody's about India. Don't you think that these differences will leave investors puzzled?

 

 Standard & Poor’s views – which may of course differ from others – are based on our rigorous analysis and our publicly available criteria so investors can understand how we arrive at our ratings. We can’t comment on the approach of other rating agencies.

 

4) India has said S&P did not take into account reform measures initiated since September 2012 to put it on a warning over rating downgrade. Do you agree?

 

 We continuously review ratings.  That is part of the surveillance process. We take into account numerous factors based on our globally consistent and publicly available criteria based on the following key factors:

 

Institutional effectiveness and political risks, economic structure and growth prospects, external liquidity and international investment position, fiscal performance and flexibility, as well as debt burden and monetary flexibility.

 

As noted in our latest report, we see signs of improvement, however, risks to India's credit growth from stalled reforms in Parliament still tilt the credit risks to the downside.

 

5) This financial year, economic growth is expected to be higher than 2012-13 when it slid to a ten-year low of 5%. It may not revert to high growth immediately. If you downgrade the ratings, won't it be a bit of wrong timing in the sense that when growth picks up you downgrade the ratings?

 

 In terms of timing, it’s important to note that our role in the market and our responsibility to investors is to highlight changes in our opinion via outlook and rating changes. When our view of India’s relative creditworthiness changes, we will communicate that to the market. 

 

6) You have also counted widening current account deficit (CAD) on low ratings for India. But, India has been able to finance the widening CAD without drawing down from forex reserves. What is the worry then, so long as capital flows are adequate?

 

India's high growth and sizable foreign currency reserves support the sovereign credit ratings. Therefore, further erosion of India’s external position, which has been one of the supporting factors of India’s sovereign ratings, could be detrimental to India’s sovereign rating.