Standard & Poor's raises its long-term foreign currency rating on India
Standard & Poor's Ratings Services on
Feb. 2, 2005 raised its long-term foreign currency rating on India by one notch to
'BB+', and affirmed its 'BB+' long-term local currency, and short-term
ratings. The outlook is stable. The upgrade on the foreign currency reflects
India's improved external position and growth prospects.
Standard & Poor's also raised its long-term foreign currency rating on
the Export-Import Bank of India by one notch to 'BB+' in line with the upgrade
on the sovereign credit rating.
"India's external balance sheet has strengthened markedly, due to
reserves accumulation and prudent debt management, which should lower the
external liquidity risk from its fiscal vulnerability," according to Standard & Poor's.
India's external position--stronger than all other sovereigns in 'BB'
rating category--is resilient and likely to be maintained in the coming years.
Its foreign exchange reserves, now more than 20x short-term debt and 6x gross
financing requirements, mitigate the risk of volatility in external and
domestic confidence. The strong growth in export earnings, particularly from
the service and manufacturing sectors, as well as non-debt foreign capital
inflows should alleviate the impact of rising imports. India's external debt
and debt service burden is expected to fall in the years ahead.
India's economic prospects are stable and good, with GDP growth likely to
hover at 6.5%-7.0% in the medium term. The service sector is dynamic, while
the industrial sector is benefiting from gradual deregulation, trade
liberalization, and modest improvements in infrastructure. The business
environment is likely to improve in the coming years, sustaining private
investment and economic growth. The banking system has also improved with
reforms; it can now support a higher economic growth, while reducing the
contingent risk on the government.
The stable outlook on the ratings reflects the expectation that the pace
of the following will be gradual: fiscal correction, further improvements in
the external sector, and lifting India's potential growth rate substantially.
The principal risks to India are generated by a weak fiscal profile,
especially its high deficit and debt, and serious fiscal inflexibility, which
is one of the worst among rated sovereigns. Although the central government
has stepped up efforts to rein in the deficit, the consolidated central and
state government deficits will amount to 10% of GDP in the near term, which
will push the ratio of general government debt to GDP higher, from more than
80% currently. The public sector, especially the electricity sector, is also