India may face negative rating pressure amid rising public debt, says Fitch

NEW DELHI: Lack of a credible medium-term strategy for stabilising rising public debt in India after the coronavirus crisis subsides could put pressure on its sovereign rating, Fitch Ratings cautioned on Wednesday, days after Moody’s downgraded the country’s credit rating.

In a review of the Asia Pacific region, Fitch said sovereign ratings in developing economies in the region remain under pressure.

“In countries in which general government debt-to-GDP ratios are already above the respective peer medians, we expect a further jump in their ratios in 2020, such as in Australia, India, Japan and Malaysia. More generally, when governments fail to present credible medium-term strategies for stabilising or reversing the recent rise in debt-to-GDP levels after the crisis subsides, this could strain ratings,” it said.

Moody’s last week cut India’s sovereign credit rating by a notch to the lowest investment grade with negative outlook, citing growing risks that Asia’s third-largest economy will face a prolonged period of slower growth amid rising debt and persistent stress in parts of the financial system.

Fitch, which has the lowest investment grade rating for India with stable outlook, has so far this year downgraded Hong Kong, the Maldives, and Sri Lanka, and removed positive outlooks on the Philippines, Thailand, and Vietnam. “The pandemic was a factor in all of these rating actions,” it added.

The rating agency said general government debt stood at 70% of GDP in FY20, well above the ‘BBB’ median of 42%. “We now expect India’s ratio of public debt/GDP to rise to 84% of GDP in FY21 – up from a forecast of 71% when we affirmed the rating in December. This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming that the government’s fiscal response remains restrained,” it said.

Fitch said the pandemic has drastically weakened India’s growth outlook and laid bare the challenges caused by a high public-debt burden. “After the global crisis, India’s GDP growth is likely to return to higher levels than ‘BBB’ category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic. The credit profile is strengthened by relative external resilience stemming from solid foreign-reserve buffers, but weakened by some lagging structural factors, including governance indicators and GDP per capita,” it added.

The rating agency expects India’s economy to contract 5% in FY21 but bounce back to grow at 9.5% in FY22.

Moody’s said the upside risks for India are higher sustained investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation; and greater confidence in a sustained reduction in general government debt over the medium-term to a level closer to the ‘BBB’ peer median.

However, the downside risks include a material increase in the fiscal deficit, causing the gross general government debt/GDP ratio to be placed on a sustained upward trajectory; and loose macroeconomic policy settings that cause a return of persistently high inflation and widening current-account deficits, which would increase the risk of external funding stress.

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