EDUCATIONAL SERIES

Issue No: 19 / 2017-18 Date: 09/02/2018

Sovereign Rating

What is Sovereign Rating?

A sovereign credit rating is the credit rating of a country or a sovereign entity.

Sovereign credit ratings give investors insight into the level of risk associated with
investing in a particular country, including its political risk. A credit rating agency will
evaluate the country’s economic and political environment to determine a
representative credit rating. Obtaining a good sovereign credit rating is usually
essential for developing countries in order to access funding, in international bond
markets.

How are they calculated?

There are no specific mathematical formulae. Agencies use publicly available

information, historical trends, discussions with government officials and future outlook
to determine credit ratings.

What is the rating scale?

Rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-,
BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything
lower than a BBB- rating is considered risky.

Who calculates Sovereign Rating?

Rating agencies like, Moody's, Standard and Poor's (S&P) and Fitch Ratings are among
the ones which operate worldwide. In India, commercial credit rating agencies include
CRISIL, CARE and ICRA among others.
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What is India’s current sovereign rating?

Credit rating agency Moody’s Investors Services on Friday, 17th November, 2017
upgraded India’s sovereign ratings to Baa2 from its lowest investment grade (Baa3),
endorsing the central government for its “wide-ranging program of economic and
institutional reforms”. It has now changed the outlook for India’s rating to stable from
positive.

What has Moody’s said about the Indian economy?

Moody’s said the decision to upgrade the ratings is underpinned by Moody’s

expectation that continued progress on economic and institutional reforms will, over
time, enhance India’s high growth potential and its large and stable financing base for
government debt, and will likely contribute to a gradual decline in the general
government debt burden over the medium term.

In the meantime, while India’s high debt burden remains a constraint on the country’s
credit profile, Moody’s believes that the reforms put in place have reduced the risk of a
sharp increase in debt, even in potential downside scenarios.

Why is the upgrade significant?

The upgrade comes at a time when rating agencies Standard and Poor’s (S&P) and
Moody’s have cut China’s sovereign rating. Moody’s cut China’s long-term local and
foreign currency issuer ratings to A1 from Aa3 on May 24 on concerns that the
country’s financial strength would erode in the coming years. S&P followed by cutting
China’s long-term sovereign credit ratings one notch to A+ from AA- on September
21. This is a sign of rising confidence in the Indian economy among the international
community, vis-à-vis China.

What has prompted the upgrade for India?

The government has undertaken a number of reforms from a nationwide goods and
services tax (GST) to new insolvency law. Many reforms are at the design phase.
Rating agency Moody’s believes that those implemented to date will advance the
government’s objective of improving the business climate, enhancing productivity,
stimulating foreign and domestic investment, and ultimately fostering strong and
sustainable growth.
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Among other things, Moody’s acknowledged improvements to the monetary policy

framework; measures to address the overhang of non-performing loans (NPAs) in the
banking system; and measures such as demonetization, the Aadhaar system of
biometric accounts and targeted delivery of benefits through the Direct Benefit
Transfer (DBT) system intended to reduce informality in the economy.

India has also leapfrogged into the 100th rank in the World Bank's Ease of Doing
Business rankings report, jumping 30 notches from last year. The World Bank’s report
also recognizes India as one of the top 10 improvers in this year’s assessment, having
implemented reforms in 8 out of 10 Doing Business indicators.

How does sovereign rating affect a common person?

A strengthening economy could prompt companies to accelerate capacity expansion

plans, increase hiring raising job prospects for many. An upgrade at this point could
have a positive bearing on India’s currency and equity markets. A rating upgrade
could be interpreted by foreign funds as a sign of a growing economy, which may
prompt them to put more funds in Indian markets. The resultant flow of dollars could
strengthen the rupee and buoy stock markets.

Key Takeaway Points

 Sovereign credit ratings have become increasingly popular as countries seek to

tap the bond markets and investors look for opportunities.
 Better sovereign ratings can reduce inflation risk, ensure political stability, and
make it cheaper to borrow money when needed

Contributed by Mr. S B Karimullah Sahib, Manager, Andhra Bank Apex College, Hyderabad

Disclaimer: The content of this bulletin is those of the author and does not necessarily
reflect that of Andhra Bank Apex College.

A publication from Andhra Bank Apex College for internal circulation only.