Triggers for rating upgrade won't be met over 12-18 months: Moody's exec

Moody's senior vice president Christian de Guzman speaks about the rating agency's upgraded ratings outlook for India and more.

A day after Moody's Investors Service changed outlook on India to stable from negative, its senior vice president and senior sovereign risk analyst Christian de Guzman tells Indivjal Dhasmana that decline in the government debt burden along with a concurrent improvement in debt affordability on a sustainable basis could lead to an upgrade in sovereign ratings. Edited excerpts:

The finance ministry of India pitched for rating upgrade but you have changed only outlook. Why?

We have changed the outlook on India’s Baa3 rating to reflect our view that the downside risks presented by financial sector instability with regards to growth and, ultimately, the government’s fiscal position have receded. Apart from the shift in our assessment of banking sector risk, our Baa3 rating continues to incorporate both the prevailing strengths and weaknesses of India’s sovereign credit profile.

Is there a case for rating upgrade and when can it be done?

We have stated that an increase in India’s growth potential, which has eroded in recent years, and a sustained decline in the government debt burden along with a concurrent improvement in debt affordability could lead to an upgrade. Our stable outlook reflects the view that these triggers will not be met over the next 12 to 18 months.

What has prevented you from changing the outlook to positive?

Although there has been a stabilisation of the financial system, there has not been material progress towards the structural weaknesses that keeps India’s current rating at Baa3. In particular, we continue to expect government debt to rise through at least fiscal year 2022/23 — although not to the same extent as we saw in fiscal year 2020/21 — and debt affordability, as measured by the ratio of government interest payments to government revenue, remains worse than pre-pandemic levels.

Moody's report said that in its meeting with finance ministry officials the rating agency has said that while India's fiscal or financial strength, including its debt profile, has materially decreased, it has become less susceptible to event risks. Are the two observations not contradictory?

Susceptibility to event risks comprises our individual assessments of political risk, government liquidity risk, banking sector risk and external vulnerability risk. While we have determined that India is now less susceptible to banking sector risk and external vulnerability risk, fiscal strength has deteriorated as government indebtedness, as well as its associated debt servicing requirements, continues to climb.

How does India fare in terms of its new outlook assigned by you vis-a-vis similarly rated countries?

Among India’s Baa3-rated peers, Italy and Russia have stable outlooks, while Romania and Sharjah have negative outlooks. India’s stable outlook is also consistent with its Baa-rated peers in Asia Pacific, including Indonesia, the Philippines and Thailand.

How do you see the establishment of National Asset Reconstruction Company Ltd (NARCL), a bad bank, in terms of making India less prone to financial risks?

The ultimate impact of the NARCL will be determined by the extent to which it can indeed absorb bad loans from the wider financial system, and whether banks will avoid the pitfalls, which previously led to the stresses that undermined growth and financial stability prior to the pandemic.