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After revising the sovereign outlook for India from stable to negative, Standard & Poor's Director for Sovereign and International Public Finance ratings Takahira Ogawa says the fiscal position holds the key to future course of action. Excerpts from an e-mail interview:
Has S&P been unfair in revising the outlook as the high fiscal deficit is largely on account of stimulus packages -- something that most governments have done globally?
Our ratings are solely focused on the level of risk of default of the entity on its payment of debts in full on time. So, regardless of the purpose, if we think that the risk of default is substantially high we will have a rating action. If the pace of deterioration is not substantial to change the ratings, but still if it were significant, we might change the outlook attached to the ratings.
Why didn't the agency wait for the new government to announce its fiscal policy stance before initiating action?
Yes, virtually every government in the world has (announced) some sort of stimulus measures which will make their fiscal position worse. However, it depends on the strength of their fiscal position and the debt burden. Unfortunately, the fiscal position of India has been weak and, though there was fiscal consolidation in the last several years, it has all been wiped out.
Besides, if you look at the vulnerability of India's fiscal position on the movement of global oil price, even if the global economy start to recover earlier than most of the forecasts, the global oil price will also get higher, which would adversely affect India's fiscal position if the government leaves the current fuel subsidy system is left untouched.
On the other hand, Thailand has abolished oil subsidies during the period when the global oil prices were cheap. So, when global oil prices increased towards the end of June last year, there was almost no fiscal implication.
Going forward, should we expect S&P to review the situation once the full budget is presented?
We are constantly monitoring the situation of the sovereigns, which we rate in terms of economy, fiscal position, inflation, external position and the value of the currency. Of course, we will carefully look at the next government's budget. However, there are other factors such as the pace of recovery of the global and the Indian economy, movement of the value of rupee against major currencies and the like, which might also affect our view on sovereign ratings. So, in this sense, the next government's budget is not the only issue which will be a focus in future.
Apart from those mentioned above, the economic growth rate both in real term and nominal term are very important factors.
Is your move going to affect Indian companies?
It's more the government actions and measure which affect the companies in India. Because of the increasing size of the government deficit, there would be higher interest rates that the companies will have to pay to borrow and/ or issue their bonds. Our change of the outlook on the sovereign ratings of India might affect the yields of the Indian companies' bonds globally and domestically but their own financial strength would be the primary driver of such yields.
How is the impact on India's deficit different from those in the developed countries, where you have not initiated such actions?
Generally speaking, the fiscal positions of most of the sovereigns which we rate are adversely affected by the global slowdown, directly or indirectly. There are already some sovereigns which were downgraded, but as I mentioned, it depends on the strength of the fiscal positions of those sovereigns, among other factors based on which we decide the level of ratings of that particular sovereign.
China announced and already started to implement a massive fiscal stimulus, but it has so far not significantly impacted its sovereign ratings as their debt burden is low and the government has capacity to have fiscal deficit.
The ratings of Bulgaria, Croatia, Hungary, Iceland, Latvia, Malaysia, Mongolia, Spain, Greece, Portugal have been downgraded. However, the level of fiscal deficits there are lower than that of India's. India's general government deficit-GDP ratio and general government debt-deficit level are among the highest of all rating category.