Sovereign Credit Ratings

With this hoo-hah about S&P keeping India’s rating on hold, I thought I would see how India fares against its peers. Sovereign rating and economic data seem harder to come by than expected, especially freely available on the internet that I can cite, but two data sources were especially useful in this:

  1. A fairly old New York Fed paper on determinants of sovereign ratings
  2. Moody’s statistical handbook from 2013.

This looks like more work than may be justified. To summarise, NY Fed believes that ratings are dependent on these factors:

  1. Per capita income
  2. GDP growth
  3. Inflation
  4. External debt
  5. Level of economic development
  6. Default history

Now #5 is a binary factor: developed vs emerging. #6 is something I can set aside as I will keep to mostly investment grade sovereigns.

This is what the data looks like. I have added some additional indicators on fiscal position. Surprisingly the Fed paper did not find the government’s fiscal position a strong indicator for rating performance. Rating agencies do state that the fiscal position matters.

Soverign Rating

It does appear that India is somewhat of an outlier, but then you would expect some indicators to be stronger while others are weaker relative to the peergroup.

Where India does poorly:

GDP per capita – adjusted for purchasing power or not – is very low relative to other Baa/BBB rated peers. CPI inflation is pretty much one of the worst. But this was back in 2012. Now inflation is at about 4-5%. Still higher than most, but not as much of an outlier. Government finances are really poor. Revenues as a percentage of GDP is among the lowest in the BBB peer group. Fiscal deficit is the worst among comparably rated countries. The debt overhang is among the worst, while interest payments as a share of government revenue is the highest by a wide margin relative to peers.

Where India does well:

Clearly GDP growth is one of the fastest in the world. Even if we disagree about the accuracy of the new series of GDP our worst growth years are better than most others’ stronger years. External debt is another place India scores well.

Other indicators:

Openness of the economy as measured by the total of exports and imports to GDP is really low. Moody’s indicator for government effectiveness (higher values suggest greater maturity and responsiveness of government institutions) is also low. The government petulant response to rating status quo is itself evidence for the poor showing here.

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