Ms Suzanne Smith, Standard & Poor's
Source :Priya Nair,BL;Mumbai, May 26,2010
The high economic growth makes India an attractive destination for foreign capital as compared to its peers.
However, its high fiscal deficit and the time taken to get permits weighs against it, says Ms Suzanne Smith, Managing Director, Corporate and Government Ratings, South & Southeast Asia, Standard & Poor's.
But the increasing foreign direct investment into the country speaks of the faith that investors have in the Indian story, she says in an interview with Business Line. Although the economic growth looks fragile in other countries and regions of the world, India is not likely to suffer any major contagion in the current year, she
said.
Excepts from the interview:
How does India compare with its peers as an investment destination?
Foreign investors look at many factors including labour laws, the legal system, corporate governance, ability to attain permits and so on.
As an investment destination, India compares favourably on growth. But one area where it compares unfavourably is the time it takes to obtain approvals, and the lengthy process for resolving disputes through the legal system. It is cumbersome for getting permissions to start business as compared to some of its neighbouring countries. But despite all this, foreign direct investment is increasing rapidly, which is good as it is a more stable source of funding than portfolio capital flows.
Is the overheating of the Indian economy a pressing concern?
India and Asia seem to be moving at a different pace than Europe and the US. Broadly speaking, credit quality is not deteriorating. Overheating is not a pressing concern. The more pressing issue is the fragility of the global economic recovery and performance of specific asset classes. The general trend is fragile, but things are looking alright in 2010-11 for India.
But heavier scrutiny is on portfolio flows. The capital markets are reactively negative over concerns regarding the deteriorating credit quality of the Government of Greece.
Though the economy could falter, we don't see any major contagion. For the corporate sector, it has not caused any downgrades. However, the current volatility in the capital markets suggests that borrowing costs for all entities, including Indian banks and corporates could increase as credit spreads widen across the board.
What are the challenges with regard to India's sovereign ratings? How does India compare to its peer countries?
India's sovereign rating is currently an investment grade rating. On the Standard & Poor scale it's a ‘BBB-' and has been at that level for the last several years. In addition to ratings, we also assign outlooks to ratings. The outlook addresses the most likely direction that we think the rating will take over the next 12-18 months. The outlook currently on the Indian sovereign ratings is ‘stable'. For some time, in 2009, it had been ‘negative' primarily because of the increase in the amount of fiscal spending the Government had announced, which was a reversal of a trend of declining fiscal deficits. That was one of the more important things causing the concern. But the outlook was revised in March this y ear from ‘negative' to ‘stable'. The primary reason is that the direction the Government is heading in terms of fiscal consolidation or steps to reduce the fiscal deficit back to levels it was previously at or even lower, in the medium term, seem to be put in place and in our view, are credible.
In terms of comparing Indian sovereign ratings to other peers the magnitude of the deficit is still a major issue. But there are a lot of positive things. The level of macro-economic growth that is occurring in India compared to other parts of the world is a positive factor for the rating.
The rating factors in different credit issues in terms of politics, the economic structure of the country and many more criteria.
Why is the rating on India: country-region ‘BBB-'despite its good economic growth, while the US, which is grappling with low growth, high deficit, is rated ‘AAA'?
As mentioned, macroeconomic growth is one of many credit factors that drive the sovereign ratings. Although the United States is currently growing at a much lower rate than India and lower than it has grown in the past, the US still has a long history of sustained economic growth which has contributed to it being the largest economy in the world. Another important credit factors supporting the AAA rating is the use of the US dollar worldwide as a reserve currency. Although India is managing its currency well, it has very different issues with regard to exchange rate management than the US. The third factor underpinning the USA would be the flexibility that the US has basically in terms of diversity of its economy, the strength of its workforce and its population, its history of innovating and getting out of problems in the past and its stable government. Those are other credit factors underpinning the ‘AAA' rating.
The outlook for the US sovereign rating is stable. This doesn't mean that it will never change, but is not expected to change in the near term. Clearly, the US is facing unprecedented pressures on the fiscal front. It has medium to long-term problems demographically, with regard to an aging population which has fiscal implications in healthcare costs, and other entitlements, pensions.
How is the credit scenario situation looking? Are there any particular companies or sectors that you are watching closely?
Credit is an issue for some sectors. For instance, the shipping sector still has issues. The automotive sector has issues globally, but in India the automotive sector is looking well.
Bharti Airtel is on credit watch with a ‘negative' outlook because of the debt funding following its acquiring of Zain Telecom. It is a significantly large debt-funded acquisition. The company is moving from a lightly leveraged company to a highly leveraged company.
We are also watching some steel companies closely because of what is going on in Europe. None of the banks are on ‘negative' watch.
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