S&P: Fiscal stance key for sovereign rating

Our Banking Bureau
13 May 2002

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.