London- India’s catastrophic COVID-19 crisis, after years of debt accumulation and incomplete reforms, does a country advertised as a future economic power still deserve an “investment-eligible” status? It makes investors more skeptical than ever.
Due to a series of downgrades last year, India’s investment grade credit rating has been hung in a thread. The severity of the current virus wave has once again upset major institutions such as S & P, Moody’s and Fitch.
All three have warned that they have reduced or could reduce their country’s growth forecast in recent weeks, saying that government debt in GDP will jump to a record 90% this year.
In that respect, the second most populous country in the world has long been anomalous.
The median debt level of countries where Fitch is in the BBB bracket (India is BBB and both Fitch and Moody’s have been warned of downgrades) is currently around 55%, the deepest of the “junk” grades. Even in countries suffering from clubs, only 70%.
Buy bond and other rating-sensitive assets as COVID-19 is pushing up debt almost everywhere and rating agencies signal that they will wait for this latest wave to subside before making a decision. Investors have their own call.
“India still sees it as investment grade,” said Jope Hanchens, head of Asian debt at NN Investment Partners, and believes the country’s economy will recover rapidly. “But we think there is at least 50/50 chance that at least one rating agency will be downgraded next year.”
Many others are also wary of rising calls for another national blockade to deal with the proliferation of new viruses.
According to JPMorgan, rating agencies are now igniting a “leap of trust.” M & G’s Eldar Vakhitov said his company’s model shows signs of downgrade, and UBS said India has the third highest debt level among the largest emerging markets after junk-rated Brazil and Argentina. It is pointed out that it will be.
UBS analysts also estimate that India needs to grow at least 10% a year for public debt to decline steadily. It hasn’t been near since 1988, according to World Bank data. The complete blockade last year saw the economy shrink by 24% in the first quarter, and Moody’s said this week it expects growth to settle in the long run by about 6%.
“We believe there is a certain risk that it (downgrade) will occur,” said Manic Naline, UBS’s Head of Emerging Markets Strategy. “It’s more of a matter of someday than whether it is.”
Neither the Indian Treasury nor the central bank responded to requests to discuss the risks of downgrades, but as Brazil and South Africa experienced, becoming a “fallen angel” is known in rating agency terms to be demoted to junk. Because it has been a wave of problems you can depart.
Automatically excludes government or corporate bonds from certain high-profile investment indexes. This means that both active manager and passive “tracker” conservative funds are sold out, making things worse.
India’s government debt is not yet included in most of these indicators, so the big problem is about $ 40- $ 45 billion worth of investment-eligible corporate debt, which could also be reduced.
NN’s Huntjens believes that about 90% of Indian IG companies will be hit, and while giants like Reliance may be spared, JPMorgan’s Asia Investment Grade Corporates Index has a 7.4% share of India. , Means there are many sells.
Even with the cuts, this is not the first time India has lost investment grade status. Due to the balance of payments crisis, it was first removed in 1991, just one year after receiving the first S & P rating.
But this repetition will be a tough moment for nationalist leader Narendra Modi, who brings together supporters with the promise of advancing India on the world stage and competing with something like China.
While building a healthy stock of foreign exchange reserves, the huge population of 1.4 billion means it is the least prosperous of investment grade countries when measured at $ 2,164 per capita GDP. .. The Chinese figure is almost $ 13,000.
Subhash Chandra Garg, former director of economics in India, admits that the government’s double-digit deficit and overall debt position are “bad,” but I don’t think rating agencies will be cut again. ..
“The debt-to-GDP ratio of 90% is certainly a big concern, and we can’t continue to do that,” Garg said. “But the basic view about India is that it’s a strong economy, not a basketball case.”
“In the end, debt levels need to go down, which can only happen if growth remains strong,” added NN Hanchens. “And it can’t be based solely on (governmental) stimulus, because debt is even higher.”
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