India’s devastating Covid-19 crisis is making investors question more than ever whether after years of debt accumulation and patchy progress on reforms, a country touted as a future economic superpower still deserves its ‘investment grade’ status.
A spate of downgrades last year had already left India’s investment grade credit ratings hanging by a thread and the severity of the current virus wave is making the main agencies, S&P, Moody’s and Fitch agitated again.
All three firms have either cut — or warned they could cut — the country’s growth forecasts in recent weeks and that government debt as a share of GDP will jump to a record 90% this year.
In that respect though, the world’s second most populous country has long been an anomaly.
The median debt level for countries Fitch has in the BBB bracket — India is BBB — and on a downgrade warning with both Fitch and Moody’s is currently around 55% and only 70% even for those languishing at the lowest depths of ‘junk’ grade.
With Covid-19 pushing up debt almost everywhere and the ratings firms signalling they will wait for this latest wave to ease before any judgements, investors who buy rating-sensitive assets like bonds are making their own calls.
With calls growing for another national lockdown to tackle the new virus surge, plenty of others are wary too.
JPMorgan says rating agencies are making “a leap of faith” by holding fire at the moment. M&G’s Eldar Vakhitov says his firm’s models have been flagging a downgrade, while UBS points out India will soon have the third highest debt level among big emerging markets after junk-rated Brazil and Argentina.
UBS analysts also estimate India needs to grow at least 10% a year for public debt to stabilise and come down. It hasn’t got anywhere near that since 1988, World Bank data shows. Last year’s full lockdown saw the economy contract 24% in the first quarter and Moody’s said this week it expects growth to settle at around 6% longer term.
Neither India’s finance ministry nor its central bank responded to requests to discuss the risk of a downgrade but, as Brazil and South Africa have experienced, becoming a ‘fallen angel’ — as a demotion to junk is known in rating agency parlance — can set off a wave of problems.
It automatically excludes government or corporate bonds from certain high-profile investment indexes, which means conservative funds — active managers as well as passive “trackers” — sell out, aggravating the situation.
India’s government debt is not yet in most of those indexes, so the big issue will be the roughly $40 billion to $45 billion worth of investment grade corporate debt that is also likely to get cut.