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Credit Rating ,Downgrade and Solutions

Sovereign debt

Commercial Loans

Bond Issues

Post the 1990s the structure of private capital flows to developing countries dramatically changed, as the bond issues exceeded bank lending. As a result the demand for sovereign credit ratings - the risk assessments assigned by credit rating agencies to government bonds - significantly increased.

Sovereign credit ratings are relative measures of creditworthiness since countries are rated against other countries.

The grades range from AAA, the highest rate, (Fitch and S&P) or Aaa (Moodys) to respectively D and Caa, the lowest rate.

For example, a credit rating between AAA and BBB- is used to denote an investment grade debt, while a debt rated BB+ to D is considered as speculative or high yield.

Impact of a downgrade
Foreign creditors may seize the foreign assets (if any) if a country reneges on its debt. Default on external debt may have a negative impact on international trade

A country may not have access to future foreign loans.

Sovereign credit ratings significantly influence the terms and the extent to which, in developing countries especially , public and private borrowers have access to international capital markets.

The sovereign debt market, unlike the corporate debt market, is characterized by the absence of a bankruptcy code
Creditworthiness of a sovereign borrower depends not only on its ability but also on its willingness to pay its debt - a crucial factor that distinguishes sovereign debts from corporate debts

Ergo political factors play a key role in determining sovereign ratings. Omitting political variables, when studying the determinants of sovereign credit ratings, can induce bias in the parameter estimates for the economic variables.

Table 3. Identification of extracted factors

Factor 1 2 3 4 5 6 7 8 9 10 11 12 13 Significance Development level Public indebtedness Quality of governance /political stability Economic growth Money supply External Liquidity External indebtedness and openness Inflationary pressure Net investment inflows Size of the economy Competitiveness Debt servicing Balance of payments
Source : Constantin Melliosa, and Eric Paget-Blanc, University of Cergy & University of Evry, France, and Fitch Ratings

Per capita income, government income, real exchange rate, inflation rate and default history
are the variables which have the most significant impact on sovereign ratings.
In contrast to the findings of previous studies, corruption index, which reflects the development level, as well as the quality of governance of a country, has a strong influence on ratings.

Problems Identified : 1. Political stalemate :Reforms - Investment environment needs to be changed -Policy Changing for FDI & other sectors

2. Low GDP :Although depreciation of rupee against dollar is good for us as our products get relatively cheaper but as we have low Industrial production (9 year low of 5.3%)and service sector also getting affected as Euro crisis and IT sector downturn which has led to export deterioration. -Infrastructural Development ,reviving power sector

3. Corruption Image Tarnish

Amount of all the scams could have been used for productive purpose Image have been shattered all over Foreign Investors has fear of loosing Investment

Investment Related Decision

FDI dropped by 41% (April 2012), 71.6% (May 2012)

Reason for lower FDI:

Adverse macro-economic condition and negative sentiment due to some adverse tax laws imposed by the government recently with retrospective effect.
Budget 2012 provisions on account of the introduction of a stringent and onerous GAAR which would effectively override favourable treaties.

What INDIA needs to DO?

Budget 2012 was amended to tax foreign investors at 10% instead of 20% and that all investors exiting in a public offer would also get capital gains tax exemption. However, the lowering of tax to 10% comes with no benefit of currency fluctuation or indexation. Thus, as an investor climate friendly move this is probably 'too little too late' and a lot more needs to be done. Indian government now needs to initiate some reforms like allowing FDI in aviation, pension, insurance and multi brand retail sectors in order to send positive signal to the global investors and win back their confidence in Indian growth story.

To truly give a boost to investors and the investment climate in India, all long term capital gains earned by foreign investors should be exempted from tax, with may be, the holding period for shares being increased from the current requirement of one year
Growth is the major sustainable tool for increasing the necessary tax collections by the government - others are short term measures! Such investment boosting measures, along with more certainty and less volatility in tax laws, will surely help in bringing about a sea-change in the Indian investment climate

Lower Down Fiscal Deficit




Removal of Subsides
What INDIA is loosing through subsides? 1,90,000 Crore (Combined subsidy given on LPG,KEROSENE and DIESEL)

Current Fiscal deficit is 5.7% of GDP Current GDP of INDIA is $1.85 Trillion

Source : The Indian Express (25th May 2012)

Last six years, the average growth rate of crude oil prices (based on the Indian basket) has been at 13.5 per cent. The average value of diesel under-recoveries, as a percentage of fiscal deficit, stood at 14.6 percent. Between 2009 and 2010, when global oil prices fell by more than 21 percentage points, diesel under-recoveries as a percentage of fiscal deficit fell only by 13 percentage points. Why it is wrong First, a subsidy of any kind involves a disincentive to use the subsidised good or service efficiently as they have been obtained cheap. Second, the government can finance a subsidy only by expanding its fiscal deficits. In the process, scarce resources are transferred from a private party (tax-payers) to the government. Source: The Hindu Business Line(24th May 2012)