Fiscal stance key for sovereign rating
13 May 2002
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.
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.
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.
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.
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.
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.
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.
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.