Standard & Poor’s Negative Outlook Impact on Indian Economy & Financial Markets
Group 2 MBF Mumbai Batch 13th May
20121
Sovereign Credit Rating – What is it ?
• Credit rating evaluates credit worthiness of debt issuer
• A Sovereign credit rating is rating of sovereign entity –a national government
• Poor rating indicate high risk of defaulting
• It is not base on mathematical formulas.• It is not base on mathematical formulas.
• Credit Rating Agencies use their experience and judgment
• Sovereign credit rating indicates risk level of investing environment of a country
• Sovereign rating takes political risk into account
Group 2 MBF Mumbai Batch 13th May
20122
S&P Rating update
• BBB- (One notch above “ Junk”)
• Stable Outlook
• BBB- affirmed• BBB- affirmed
• Negative Outlook – 33% Chance of Downgrade
Group 2 MBF Mumbai Batch 13th May
20123
Where are we ? Lowest Investment Category
AAA
AA
A
BBBBBB
BBB- ( India)
BB
B ,CCC , CC, C
D ( Default)Group 2 MBF Mumbai Batch 13th May
20124
S&P Global RatingStandard & Poor's Foreign Rating in April 2012
Group 2 MBF Mumbai Batch 13th May
20125
Negative Outlook- Rational
• High Fiscal Deficit – Target for 2012-13 5.1% of GDP
– 2011-12 was 5.9 % very high against target of 4.6%
• High Current a/c deficit 3.7% of GDP in 2011-12– 3.7% of GDP in 2011-12
– 4.3% of GDP in Q3 2011-12 ( Highest since Balance of
payment crisis in1991)
• Lowest GDP Growth in last 3 Years – 6.8% 2011-12 against 8.4% in 2010-11
Group 2 MBF Mumbai Batch 13th May
20127
Negative Outlook- Rational
• Slow pace of fiscal Consolidation
• Continued Inflationary pressure
• High Subsidy burden ( Fuel, Fertilizer)
• Governments policy reversal• Governments policy reversal
– FDI in Multi brand Retail
• High Debt/GDP Ratio
Group 2 MBF Mumbai Batch 13th May
20128
Impact of Negative Outlook
• 1/3 Chance of Downgrade in next two years
• 60% of countries that see an outlook downgrade face a
ratings downgrade in 7 months
• If downgraded, India will be non investment
grade.grade.
• Further depreciation of Indian Currency
• Overseas Borrowing will be difficult
Group 2 MBF Mumbai Batch 13th May
20129
Impact So Far ….
• Currency Depreciation
• Benchmark Index Down
• FII Net sale
• 10 Yrs Bond Yield Increased • 10 Yrs Bond Yield Increased
– No Cool down despite of 50 Bps Cut by RBI
Group 2 MBF Mumbai Batch 13th May
201210
Impact So Far ….15th April 11th May
NIFTY – 5207 4928
INR/Dollar – 51.42 53.64RBI Reference Rate
0.99
1.00
1.01
1.02
1.03
Group 2 MBF Mumbai Batch 13th May
2012
0.94
0.95
0.96
0.97
0.98
INR/USD
Nifty
11
Impact So Far ….0
.00
0.5
01
.00
1.5
0
FII Net Flow ( Equity+ Debt ) Source SEBI ( Rs in '000 Crores)
Group 2 MBF Mumbai Batch 13th May
2012
-2.5
0-2
.00
-1.5
0-1
.00
-0.5
00
.00
23-Apr 24-Apr 25-Apr 26-Apr 27-Apr 30-Apr 2-May 3-May 4-May 7-May 8-May 9-May 10-May 11-May
12
Impact So Far ….10 Year Bond Yield Since 10th April 2012
Source : www.bloomberg.com
50 Bps Rate Cut by RBI
No Impact of 50
Bps Rate Cut by RBI50 Bps Rate Cut by RBI
Group 2 MBF Mumbai Batch 13th May
201213
Impact of S&P Rating Downgrade
• In Aug 2011, S&P cuts US Rating from AAA to AA+
• One Notch down from Highest Safety category
• Dow plunges 634 points; NASDAQ, S&P fall almost 7%
US Rating Downgrade
Group 2 MBF Mumbai Batch 13th May
2012
• No more Investment Category “Junk”
• FII’s Big sell off
• Capital Markets May hit lower circuits
• Increased bond Yield , Bond Prices fall
• Panic all around
If Downgrade India Rating
14
State of Economic Dilemma
Limited Room for Policies
• Current A/c Deficit
• Weak Investment
Increased borrowing costs
• Will dampen the interest in local currency
FII’s will avoid India
• Lack of confidence among FII’s
Group 2 MBF Mumbai Batch 13th May
2012
• Weak Investment & Economic Growth
• High & Structural Inflation + Fiscal Deficit
• Leaves No Room for Policies
currency debt, which has already weakened on other related uncertainties
among FII’s
• Weak global investment climate
• Policy paralysis, sticky inflation and slowing growth
15
State of Economic Dilemma
Further Depreciation of Currency
• FII’s Withdrawal of Funds ( net sell)
• High Oil import bill
Slows Economic Growth
• Investor flows likely to decrease
• not a favorable
Paralyzed Government
• UPA 2 is not facilitating economic activity , it is too busy fire-
Group 2 MBF Mumbai Batch 13th May
2012
• High Oil import bill
• Further depreciation in Currency will add fuel to Inflation
• not a favorable blend for investors in India
• Downgrade creates a vicious cycle
• Difficult to come out of it .
economic activity , it is too busy fire-fighting scams
• Has put off FII with recent Tax Polices
• Post UP Election Weakened bargaining power of Congress.
16
Can India Avoid Downgrade ?• Negative Out look is Wakeup call , still much better then peers
• Strong growth prospect and young population
• Indonesia and Philippines gained in investment rating due to
improved performance (so can we)
• Take Stringent Policy Decision
• Cut Subsidy Bill in Fuel, Fertilizer, Social Programs NREG
• Relax FDI in Banking, Insurance & Pension, Retail, Aviation
• Fast Track Implementation of GST, DTC
• Boost Investor Sentiment, More FII inflow
• Easing Interest rates further boost sentiment in Business
• Eventually high GDP Growth trajectory.
Group 2 MBF Mumbai Batch 13th May
201218
Risks
• Biggest Risk to Indian Economy is absence of Political
Consensus
• Implementation of key polices
• Opposition to reduce diesel subsidy, reversal of gold
duty, retro tax provision, GST rollback, FDI in retail rollbackduty, retro tax provision, GST rollback, FDI in retail rollback
• Un due Political Pressure from coalition parties.
Group 2 MBF Mumbai Batch 13th May
201219
S&P – Can we trust?
• Every Major crisis has been missed by the rating agencies and in aftermath of every crisis they have been very quick to downgrade – Montek singh Ahluwalia deputy chairman PMEAC
• Assigned high rating to Latin America in 1980’s especially at time when they were going bustespecially at time when they were going bust
• They had positive rating for Asian economics when they were going bust in 1997-98
• Euro crises – no downgrade
• They had not downgraded US in 2008 sub-prime crises
• They had not downgraded Lehman Brothers in 2008.
Group 2 MBF Mumbai Batch 13th May
201220
Various responses on Outlook revision
• No Need to Panic government is committed to economic reforms, it
should be taken as timely Warning – Pranab Mukhrejee Finance Minster
• Government should see this as a wake up call and address these issues –
CLSA Singapore
• Some concerns expressed by S&P will be resolved during the year. I would
expect S&P to reverse and perhaps upgrade rather than downgrade –expect S&P to reverse and perhaps upgrade rather than downgrade –
C Rangrajan PMEAC chairman
• A downgrade is likely if the economic growth prospects dim, external
position deteriorates, political climate worsen or fiscal reforms slow.-
Ogawa S&P
Group 2 MBF Mumbai Batch 13th May
201221