The irony behind Moody's India rating upgrade
Irony has a synonym in the world of finance - sovereign credit rating. Right at a time when even government narrators have started conceding on "transient dip" in growth and deviation from fiscal road map, Moody's delivered a rating upgrade to India, loaded with inconsistencies best to the "reputation" of sovereign ratings.
Across the globe, in the past few years, sovereign ratings have seldom been consistent with economic realities of rated countries. India had some long-drawn and fairly right grudges against the contradictions palpable in rating agencies' conservative outlook on the country.
What is interesting to me is the ‘upgrade’ in #Moody’s metrics with India’s upgrade. Agency went ‘liberal’ on reform commitments despite high debt & low growth.
— anshuman tiwari (@anshuman1tiwari) November 17, 2017
The same contradiction of ratings laughed on India in an unusual fashion. During the same time last year, the Moody's had sternly declined India's aggressive bid for a sovereign upgrade on account of better GDP growth and investment promotion policies of the Modi government. Moody's expressed concerns over the country’s high debt levels and pile of bad loans in the banking system. Subsequently, India had not only disparaged Moody’s ratings methods, but in the Economic Survey 2016-17, highlighted “poor standards” of the rating agencies.
Interestingly, going by macros and rating methods, India was better placed for an upgrade during last year than now. At a time when crude prices are heating up, the GST is turning painful, and demonetisation has pulled the growth down, Moody's has delivered a surprising upgrade.
While fiscal slippage seems inevitable, Moody’s expects India to improve fiscally and reduce debt in the medium- to long-run, by better revenues from GST and savings in expenditure.
Macros are not the only surprise to Moody's enthusiasm. In June Moody's had declared India's debt level significantly higher against the category peers like Bahamas and South Africa.
Now, markets will have to find out what has changed with India's debt or fiscal deficit profile in the past six months, which altered Moody's mood on India.
In the medium run, #Moody’s might be bang OFF the target, GST will hit revenues & derail fiscal consolidation. https://t.co/vL4egMbm6n
— anshuman tiwari (@anshuman1tiwari) November 17, 2017
However, that is what the ironic beauty of sovereign ratings is. The financial markets always get puzzled with different ratings by key agencies (Fitch, Moody's and Standard & Poor's) for the similar set of economies. Recently, Moody's downgraded China even as equity markets boomed there, while S&P upgraded Indonesia on the back of tepid equity show.
India has never been a favourite of sovereign rating agencies despite having reasonably better indicators than its European peers. Spain and Italy are worse than India on debt (government and corporate) and (low) growth parameters, yet Fitch and S&P obliged Spain with a rating two notches higher than India. Moody’s rated Spain one notch higher. Fitch and Moody’s rated Italy a level higher than India’s sovereigns rating, while S&P rated India and Italy on a par.
India has every right to feel that its ratings upgrade was long overdue as the country has come a long way in last one decade in terms of growth, better macros and fiscal prudence without ratings upgrade. The last sovereign upgrade for India came in January 2007 and August 2006, when S&P and Fitch upgraded India’s sovereign rating while, before Friday's upgrade, Moody’s upgraded India to ‘Baa3’ in January 2004.
India has always complained that its sovereign ratings don’t reflect the country’s fundamentals and prospects. Ironically, the long-awaited ratings upgrade is disconnected with the economic realities even now, but consistent with the incongruity of sovereign ratings business.