Chennai: Sovereign credit standing will henceforth depend more on the fiscal stance governments take, says Standard and Poors (S&P). It is to be stated that most of the Asian economies have bolstered their external positions in a significant manner and S&P downgraded its ratings on India and Japan recently with negative outlook.

In August 2001, S&P lowered its local currency rating on India to BBB- (triple B minus) from BBB. More recently S&P lowered its foreign and local currency ratings on Japan to AA- (double A minus) from AA.

According to S&P general government deficits will exceed 10 per cent this year. Tepid fiscal reform will only modestly curb these deficits. Indias difficult fiscal position can be illustrated by the following ratios: interest expense represents 47 per cent of general government revenue; gross general government debt exceeds 75 per cent of GDP; and government debt absorbs half of domestic credit.

S&P expects that Japans 2002-2003 general government deficits will reach nearly 9 per cent of GDP. Even under optimistic assumptions, gross general government debt to GDP will not peak before the latter part of this decade at 200 per cent of GDP.

Conversely, improving fiscal trends have led to credit improvements in respect of the Philippines, Malaysia and Korea. In April 2002, S&P revised its local and foreign rating of the Philippines to BBB+ and BB+ with stable outlook. The revision is attributed to a good fiscal outturn in 2001 and prospects for further fiscal consolidation during the remainder of president Gloria Macapagal Arroyos term.

In March 2002, S&P changed its outlook on the triple-B foreign currency and single-A local currency ratings on Malaysia to positive from stable, on the strength of a projection that the general government budget will reach broad balance by 2004, thus stabilising government debt at modest levels and easing pressure on the Malaysian ringgit-US dollar peg.

In November 2001, the rating agency raised its foreign currency rating on Korea to triple-B-plus and the local currency rating to single-A-plus, in part based on an impressive fiscal performance throughout the aftermath of the 1997-1998 Asian financial crisis. General government accounts are in broad balance and prompt corrective actions in banking sector reform have helped contain fiscal losses and permitted the quick resumption of bank lending.

As for China weaknesses in public finance remain a constraint on the triple-B foreign currency rating on the country. With general government deficits of 5 per cent and prospective general government debt to GDP (including debt issued by asset management companies and estimates for recapitalising public sector financial institutions) of more than 70 per cent, China will need to reform tax collection, tighten intergovernmental fiscal relations, and, most importantly, staunch quasi-fiscal lending to lay the conditions for continued improvements in its populations standard of living, says S&P.