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A Closer Look at India’s Credit Rating: An Unjustified Bias?India, the world’s fifth-largest economy, has been assigned a credit rating of BBB- by and Fitch Ratings and Baa3 by Moody's Corporation. These ratings are the lowest investment grade, just a notch above “speculative” or “junk” status. This is despite India’s robust economic fundamentals and a history of zero sovereign default.Let’s see what the numbers say about this. As of January 2021, India’s foreign exchange reserves stood at US$ 584.24 billion. This is greater than India’s total external debt (including that of the private sector) of US$ 556.2 billion as of September 2020. In corporate finance language, India resembles a firm with negative debt, whose probability of default is zero by definition.Yet, the credit rating does not reflect these strong fundamentals. This perceived bias has real-world implications. A lower credit rating means higher borrowing costs. For instance, a one-notch rating upgrade can reduce the government’s annual borrowing cost by 0.6% of GDP.Moreover, this bias can exacerbate economic crises in developing countries. Foreign investors often retreat to “safe” investments in highly-rated economies during economic uncertainty. This can lead to a sudden outflow of capital from developing economies, worsening their economic situation.A recent paper by the economic division of India’s finance ministry has highlighted the need for reform in the credit rating process. The paper focuses on global credit rating agencies like Moody’s, Fitch, and Standard & Poor’s.Here are the key points from the paper:Opaqueness and Disadvantage: The rating methodologies employed by these agencies were criticized for their lack of transparency. Developing countries, including India, face adverse consequences due to this ambiguousness. For instance:Foreign Ownership Weight: Fitch’s methodology assigns greater weight to foreign ownership of banks, ignoring the developmental role played by state-run entities.Lack of Transparency in Expert Selection: The experts consulted by these agencies are chosen in a non-transparent manner, adding another layer of opaqueness to an already complex methodology.Clarity on Weight Assignment: The paper argues that there is a lack of clarity regarding the weights assigned to each parameter.Default Risk and Funding Costs: Reforming the sovereign rating process is crucial to reflect the default risk of developing economies accurately. Transparent processes would save these countries billions in funding costs.Developing Country’s Concerns: Developing nations often bear the brunt of credit rating downgrades despite experiencing milder economic contractions than their advanced economy counterparts.In summary, the paper emphasizes the urgency for adequate reforms in the credit rating system, ensuring that ratings truly reflect a developing economy’s willingness to pay back. #finance #rating #credit #gdp

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Is it time to put the China balance sheet recession story on hold? Perhaps, at least for the time being....#chinaeconomy #balancesheetrecession #globaldebt #macrostrategySee also: https://lnkd.in/eUrtJB8hThe latest BIS data release (18 September 2023) provides another example of how China stands out among relatively indebted, global economies. In contrast to developments elsewhere, the debt ratios of both the corporate (NFC) sector and, to a much lesser extent, the household (HH) sector rose between 1Q22 and 1Q23 – putting the idea of a balance sheet recession on hold, at least for the time being.But note...In 1Q23, China’s private sector debt ratio hit a new high of 227% GDP. This is thesame levelreached at the peak of Spain’s debt bubble in 2Q10 and 13ppt higher than Japan’s peak back in 4Q94 (and an excuse to repost one of my favourite charts from 2017 in the comments below).https://lnkd.in/ej9GybhYAsalso noted before, the level of bank credit to GDP is much higher in China than in other “bubble phases”, leaving the country’s banks relatively exposed to the risks of private sector indebtedness.https://lnkd.in/etxFGrBhAffordability risks also hit a new high, with China’s private sector debt service ratio reaching 21.3%, 5.5ppt above its long-term average. China’s private sector is unique among BIS reporting economies in terms of recording a new debt service ratio high in 1Q23, although the same is also true for the HH debt service ratios in Canada, Korea and Sweden.So what?With growth slowing, China appears to be reverting to higher levels of corporate credit as a solution, at least in the short term. The risks associated with this familiar strategy remain high. If successful, however, it would represent a new and unique chapter in the history of global debt dynamics.

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"Debt: The Invisible Leverage of the Economy"Nice and intriguing interactive chart, that shows the evolution of public debt as a percentage of GDP over the past two decades, coupled with foresight into the coming few years.China, standing at the forefront of development, sees its debt escalating. But is it all gloom and doom? Surprisingly, it's part of the economic norms. As economies mature, their public debt ratio to GDP tends to inflate. With the US a bit more 'advanced' already than the average of the others.Emerging Markets and the world's lowest-income economies are trailing, yet it's not a call for complacency. Public debt isn't inherently a villain, but its leverage can be a risky business in a volatile world in which interest rates are on the rise. Governments that spend their borrowed money well can stimulate their economy and well-being of the people. But when the costs of the leverage exceed certain acceptable thresholds it is definitely not impossible that what was good will turn bad.I have seen Western pundits use this kind of chart to triumphantly point to Chinese weakness. But is that really true?Just go to the following page in the CIA Factbook: https://lnkd.in/dX6d3zJU that shows the Foreign Currency and Gold Reserves per country. A kind of proxy for debt service capacity if you like. Still think that China is the one with biggest issues? On a net basis the biggest problems could be with the LIC group with lowest debts!And also: this kind of charts are often based on nominal GDP figures. But (public)debt-financed investments in an economy can only be evaluated well when also taking into account the purchasing power that such GDP represents in my opinion. So yes: China is still classified as EM by MSCI, but rapidly moving up the ranks.In general: when the world globalizes and technical innovation enables us to do far more business internationally than before, then a larger leverage globally could be OK. However, we are currently at a crossroads full of geopolitical powerplay, uncertainty and inflation in a world that moves from unipolar to bipolar. Not one that fits neatly with increased leverage.More debt doesn't necessarily eclipse low debt, but it's a potent reminder of the potential risks involved. A topic worth pondering over. #DebtEconomics #GlobalEconomy #FinanceInsights #China #ForeignReserves #Gold #Leverage #PublicDebt #MonetaryEconomics

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A confident India has taken on Moody's Corporation, , Fitch Ratings “opaquenss”**A change of narratives begins when India weighs in on existing ones. Views?“Over-reliance on non-transparent qualitative factors (perceptions, value judgements, views of a limited number of experts, & surveys with loose methodologies) in sovereign rating, results in unacceptable outcomes. Makes rating of developing countries almost invariant wrt even sizeable movements in relevant macro fundas. Base rating, estimated through quantitative scoring of macro-fundamentals, is overridden by qualitative considerations. Loose qualitative info is fed into the quantitative overlay based purely on the agency’s subjective assessment of the country’s willingness & ability to pay gets loaded against developing countries. The composite result of this is exemplified by India's recent rating historyThe rating of India remained static at BBB- during the last 15 years, despite it climbing the ladders from the 12th largest economy in the world in 2008 to the 5th largest in 2023, with the second-highest growth rate recorded during the period among all the comparator economies. Thereby, any improvement in macro-economic parameters may virtually mean nothing for a credit rating if qualitative parameters are judged to be in need of improvement. This has serious implications for developing sovereigns' access to capital markets & ability to borrow at affordable ratesIs dependence on less-than-optimal qualitative information unavoidable? The ans. is a clear NO. On a zero base, there can’t be any better-revealed preference for willingness & determination to pay back a country's debt obligations than its repayment history itself. Thus, a nation that hasn’t defaulted throughout its external debt history & through the vicissitudes of its socio-economic development should be taken as fool-proof in its 'willingness to pay' back. This, if made the benchmark, can form the basis for the treatment of different combinations of debt defaults & reasons therein on the one hand & the assessment of the willingness to pay on the other. This involves painstakingly building up country-wise baseline information on debt history, instances of restructuring, defaults, & the circ*mstances leading to such events. However, this will do enormous good to the credibility of credit rating by enabling the CRAs to dispense with mechanical application of unconvincing qualitative information & judgements. Such information can be the last resort when all other options for applying authentic, verifiable information are precludedEven if governance indicators are to be relied upon, they must be based on clear, well-defined, measurable principles than subjective judgements by CRAs. Like all subjective qualifications, these also suffer from heuristic & cognitive biases (echo chambers, bandwagon effects, & difficult-to-change commitment & confirmation biases)”Well done 👍🏽🇮🇳 https://lnkd.in/dmgAc_KP

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The article from Visual Capitalist discusses two separate topics: the top 10 countries most in debt to the IMF and the changing share of global GDP among the top six economies from 1980 to 2024.**Top 10 Countries Most in Debt to the IMF:**1. **Argentina**: Argentina leads the list with a debt equivalent to 5.3% of its GDP, totaling over $32 billion.2. **Egypt**: Egypt follows with a debt of $11 billion, accounting for 3.1% of its GDP.3. **Ukraine**: Ukraine owes $9 billion to the IMF, which is 4.7% of its GDP, largely due to the conflict with Russia.4. **Pakistan**, **Ecuador**, **Colombia**, **Angola**, **Kenya**, **Ghana**, and **Ivory Coast** round out the top 10.5. The top 10 countries account for about 69% of the total IMF debt, which stands at $111 billion.6. Argentina's history of debt issues dates back to the late 1890s, with multiple bailouts from the IMF over the decades.**Changing Share of Global GDP:**1. **U.S. Resilience**: The U.S. economy's share of global GDP has fluctuated significantly over the years but has seen a stronger recovery post the COVID-19 pandemic, reaching an estimated 26.3% of global GDP in 2024.2. **China's Rise**: China has experienced rapid economic growth since the early 2000s, coinciding with its accession to the WTO in 2001.3. **Japan's Decline**: Japan, once the second-largest economy after the U.S., has seen a relative decline due to economic stagnation and an aging population.**Key Insights:**- The IMF provides financial aid to countries facing economic crises, currency stabilization, and structural reforms.- The top 10 indebted countries are spread across Africa, South America, and Europe, with Argentina leading the list.- The changing dynamics of global GDP shares reflect economic policies, technological advancements, and demographic trends.- China's integration into the global economy and the U.S.'s recovery from the COVID-19 pandemic are notable trends.Overall, the article provides insights into both the debt challenges faced by various countries and the shifting landscape of global economic power.

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Debt, Trade Barriers And Uncertainty Will Drag On Asian Economies In 2024: World Bank ReportAsian economies are not doing as well as they could and growth in the region is forecast to slow to 4.5% this year from 5.1% in 2023, the World Bank said in a report.Debt, trade barriers and policy uncertainties are dulling the region’s economic dynamism and governments need to do more to address long-term problems such as weak social safety nets and underinvestment in education, the report says.Asia’s economies are growing more slowly than before the pandemic, but faster than other parts of the world. And a rebound in global trade — trade in goods and services grew by only 0.2% in 2023 but is projected to grow by 2.3% this year — and easing financial conditions as central banks cut interest rates will help offset weaker growth in China.“This report demonstrates the region is outperforming much of the rest of the world, but it’s underachieving its own potential,” Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, said in an online briefing.“The leading firms in the region are not playing the … role that they should,” he added.A key risk is that the U.S. Federal Reserve and other major central banks might keep interest rates higher than before the pandemic. Another comes from the nearly 3,000 trade-distorting measures, such as higher tariffs or subsidies, that were imposed in 2023, the report said.Most of those policies were set by major industrial economies such as the U.S., China and India.China’s ruling Communist Party has set an official target for about 5% growth this year, just below the 5.2% annual pace of last year.The World Bank is forecasting that growth will slow to 4.5%.“China is aiming to transition to a more balanced growth path but the quest to ignite alternative demand drivers is proving difficult,” the report says.Mattoo said Beijing still has a way to go in shifting its economy away from reliance on real estate construction to drive business activity, and just spending more money won’t fix the problem.“The challenge for China is to choose efficient policies,” he said. “Fiscal stimulus will not fix structural imbalances,” he said. What is needed are stronger social welfare and other programs that will enable households to spend more, boosting demand that will then encourage businesses to invest.The region could be doing much better with improved productivity and greater efficiency, Mattoo said.Vietnam, for example, is drawing huge amounts of foreign investment as a favored destination for foreign manufacturers, but its growth rate of about 5% is below its potential.

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Credit to ReutersDecember 6, 2023Moody's puts China on downgrade warning as growth, property pressures mounthttps://lnkd.in/gPDpMeM9Video Credit to https://lnkd.in/gZZmGFRJRatings agency Moody's slapped a downgrade warning on China's credit rating on Tuesday, saying costs to bail out local governments and state firms and control its property crisis would weigh on the world's No. 2 economy.Moody's lowered the 'outlook' on China's A1 debt rating to "negative" from "stable" less than a month after it had done the same to theUnited States' last remaining triple-A grade from a credit rating agency.Beijing likely needs to provide more support for debt-laden local governments and state firms which pose "broad downside risks to China's fiscal, economic and institutional strength," it added.Moody's also cited "increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector."China's Finance Ministry called the decision disappointing, saying the economy would rebound and that the property crisis and local government debt worries were controllable.Blue-chip stocks slumped nearly 2% to near five-year lows on growth worries, with some traders also citing speculation about Moody's statement before its release.The cost of insuring China's sovereign debt against a default rose to its highest since mid-November, while the U.S.-listed shares of heavyweight Chinese firms Alibaba and JD.com dropped 1% and 2%, respectively.Moody's main peer, S&P Global, said later in a long-scheduled global outlook call that its big concern was that "spillovers" from any worsening in the property crisis could push China's gross domestic product growth "below 3%" next year.China'sgovernment advisersare expected to call for more stimulus at the annual agenda-setting 'Central Economic Work Conference' due to be held in the next week.The economy has struggled to mount a strong post-pandemic recovery as the deepening housing crisis, local government debt concerns, slowing global growth and geopolitical tensions have curbed momentumIn October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) in sovereign bonds by year-end to help kick-start activity, raising the 2023 budget deficit target to 3.8% of GDP from the original 3%.Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China's economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund (IMF).Capital outflows from China have also intensified, reaching $75 billion in September, in the biggest monthly exodus since 2016, Goldman Sachs data showed.($1 = 7.1430 Chinese yuan renminbi)

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INDIA'S INCLUSION IN JP MORGAN'S BOND INDEX - WHAT DOES IT MEAN FOR INDIA?--JPMorgan has announced the inclusion of Indian government bonds in its Government Bond Index-Emerging Markets (GBI-EM) from June 2024. This is the first time the country will be included in the index, which could result in billions of dollars of inflows into local currency-denominated government debt and bring down bond yields. While the equity markets are not expected to be directly impacted, this move is likely to provide some support for the rupee.India's securities are now index-eligible! The Reserve Bank of India introduced a "fully accessible route"(FAR) that exempts certain securities from foreign investment restrictions, making them eligible for global indexes. Currently, 23 Indian Government Bonds worth $330 billion are index-eligible, and 73% of benchmarked investors voted in favor of India's inclusion, according to JPMorgan.EXPECTED INFLOWS?JPMorgan has announced that Indian bonds will hold a weight of 10% in its index, with a monthly addition of 1% starting from next June. Analysts estimate that this inclusion could lead to inflows of approximately $24 billion over ten months, which is significantly higher than the $3.5 billion invested in Indian debt by foreign investors so far this year. Furthermore, foreign holdings of outstanding bonds are expected to rise to 3.4% by April-May 2025, up from the current 1.7%.THE IMPACT ON BOND YIELDS, BORROWING COSTS?India's fiscal deficit target of 5.9% of GDP for the year ending March 31, 2024, is set to boost government borrowing to a record 15 trillion rupees. Banks, insurance companies, and mutual funds are the largest buyers of government debt. This additional source of funds will help cap bond yields and the government's borrowing costs, benefiting corporate borrowers whose borrowing costs are benchmarked to government bonds. Traders estimate the benchmark bond yield will fall 10-15 basis points to 7% over the next few months. However, foreign flows will increase, making the bond and currency markets more volatile and could push the government and central bank to intervene more actively.WHERE WILL THE RUPEE STAND THEN?India's larger debt inflows from next financial year may make it easier to finance its current account deficit. According to IDFC First Bank, the index inclusion-related inflows of almost $24 billion will cover a significant portion of India's $81 billion current account deficit. This is good news for India's economy as it will help reduce the pressure on the rupee.

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Why does India have a POOR credit rating despite its global standing?Over the past decade, India has shown some remarkable economic growth—overcoming global challenges like the COVID pandemic and geopolitical conflicts like the Russia-Ukraine and Israel-Palestine wars!Now, when a nation experiences exceptional growth, one of the significant global benefits is → an enhanced credit rating.To understand it better, let’s begin with— 👉What is a credit rating? — A credit rating is an assessment of a country's ability to pay back its debts.It's given by “credit rating agencies”, which are private companies that specialize in evaluating the creditworthiness of borrowers. These ratings are CRUCIAL because they influence the interest rates a country has to pay on its loans. Higher ratings = lower interest rates, and vice versa.Now… surprisingly, India, despite being the 5th largest economy globally and the fastest-growing country, maintains a relatively conservative debt-to-GDP ratio of 81%!YET, India finds itself rated LOWER than countries like Peru, the Philippines, and even Kazakhstan! This seemingly paradoxical situation results in India >> paying substantial extra interest, hampering foreign portfolio investment and causing financial losses.👉Is India being discriminated against by credit rating agencies? How does it impact the economy?India is facing discriminatory practices from credit rating agencies, attributing its lower rating to factors beyond economic growth––considerations like inflation, debt levels, and political stability contribute to this unfavorable assessment. India's challenges include:- high inflation and- substantial debt burden—impacting its creditworthiness.This lower rating results in India incurring ADDITIONAL interest costs annually and creates hurdles for Indian companies seeking foreign loans. In response, the Indian government is actively working to enhance its credit rating by managing its debt and controlling inflation.👉Why is India seeming to be unfairly treated when it comes to credit ratings?It's puzzling because all our key economic indicators are IN-LINE with global standards. Adding to the mystery, we've never defaulted on our loans.What's even more surprising is that, in the entire history of the world, no other fifth-largest economy has ever had such a poor credit rating. This has prompted our finance ministry to raise objections against these credit rating agencies.Some might say that it's due to government corruption, excessive debt, or even geopolitical bias against our leaders. But, these arguments fall short because India's credit rating has been on a downward spiral for the past 20 years!— spanning across different governments.→What steps do you believe should be taken to address this situation?#india #finance #economy

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Credit Flow Mapping and Economic GrowthCredit flow mapping is a useful tool for understanding the financial health of a country. It can help to identify areas where there is a lot of credit flowing, and areas where there is not. This information can then be used to make predictions about the future growth of the economy.In the case of India, China, and Germany, credit flow mapping suggests that India is in a better position for growth than China and Germany. This is because India has a lower debt-to-asset ratio than China and Germany. This means that Indian households and businesses are less indebted, and therefore have more financial resources to invest in the economy.In addition, China's economy is currently in a leveraging cycle of material accumulation, while Germany's economy is in a deleveraging cycle. This means that businesses and households in China and Germany are taking on more debt in order to buy assets, such as property and machinery, while Indian businesses and households are paying down debt. This can be a risky strategy, as it can lead to a debt crisis if the economy slows down.India, on the other hand, is not in a leveraging cycle and is not in a deleveraging cycle. This means that Indian businesses and households are not taking on as much debt, and therefore are less likely to be exposed to a debt crisis.Of course, monetary policy also plays a role in determining the future growth of an economy. If the Indian government implements sound monetary policies, then it is likely that India will experience strong growth in the coming decade. However, if the government implements poor monetary policies, then India's growth could be hindered.As you can see, India has the lowest debt-to-asset ratio, followed by China and Germany. This suggests that India is in the best position for growth in the coming decade.

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