Time to rate the rating agencies

Siddharth Tak and Rohit Joshi / Zee Research Group / Delhi

It’s not only Indian ministries or government department that tend to goof up on data and its interpretation. Globally renowned rating agencies also do mistakes while making pronouncements based on data study and analysis. Recently, ministry of statistics had to face a lot of flak for giving wrong figures of IIP, and export but who would audit international rating agencies when they err on the side of caution?

Standard & Poor's (S&P) warned early this month that India could be the first of the BRIC major emerging economies to lose its investment-grade debt classification. However, nobody is pondering over the calculations of S&P that assigned a better sovereign credit rating to a dooming economy like Spain (BBB+) in comparison to India (BBB -) .The Spain episode comes in the wake of earlier misread conclusions drawn by global rating agencies. The objective is not to term concerns raised by them as fictitious but to put them in perspective.

Although these two economies (Spain and India) are not comparable in the strictest sense, yet there are facts on both the side which support and contradict Spain’s current rating. These pertain to the macroeconomic fundaments that form the basis for country ratings.

On the positive side, as per world economic outlook report by IMF, GDP per capita of Spain is 32,360 US dollars which is 23 times more than that of India (1389 US dollars). Putting it in simple words, per capita GDP is used as an indicator of standard of living and this shows that Spain has a very high standard of living in comparison to a country like India. A lower inflation has also contributed to the superior rating of Spain. Furthermore, Spain being a part of Euro enjoys lesser currency risk in comparison to India.

However, on the negative side, there are some eye-opening facts which pinpoint that Spain is not at all worthy of holding its present credit rating assigned by S&P. The deteriorating GDP growth of Spain doesn’t augur well for it. In 2011, GDP grew by mere 0.7 per cent and the shocking news is that IMF has predicted a negative growth rate of 1.8 per cent for 2012.

Unemployment rate of 21.6 per cent is expected to climb to levels of 24.6 per cent by 2012. Spain’s declining savings rate (18.4 per cent of GDP) is a threat to the country’s economy. Adding to the woes is the recent news which stated that Spain government had requested a rescue for its banks from the European Union's emergency fund .This means that further debt is added to already outsize official borrowings and as per IMF estimates, the government gross debt as a per cent of GDP is expected to increase to 79 levels in 2012 from the current levels of 68.5.These negatives seem to overshadow the previous listed positives, and hence demand a review of credit rating assigned to Spain by S&P.

As far as India is concerned, although there are negatives prevailing in the Indian economy like the much talked about policy paralysis, slowdown in GDP, high twin deficits (Fiscal and current account) and persistent inflationary pressures yet high savings (31.5 per cent of GDP) and investment (34.4 per cent) ratios, low reliance on external debt, resilient banking and corporate balance sheet, and the second largest consumer market in the world are key pillars of strength for the Indian economy.

Furthermore, IMF projects that government gross debt as a per cent of GDP is expected to decrease to 67.6 levels in 2012 from the current levels of 68.1 which provides a cushion against potential external shocks. Over and above, at a time when India’s Balance of Payments (BOP) is coming under strain, the PM’s announcement of a contribution of 10 billion US dollars towards the IMF’s eurozone fund shows a confidence in the nation’s ability to surmount its current economic challenges.

It is worthwhile to note that the difference in ratings between the two countries (Spain and India) is mainly found on S&P’s scale while the other rating agencies like Moody’s and Fitch have kept both the sovereign ratings at a similar scale. This once again raises the doubt about the criteria used by S&P for arriving at a sovereign rating.

In past, many incidents appeared when the rating agencies came under some criticism for their calculations. Zee Research Group (ZRG) also profiles some of those major incidents so far –

• Enron Corp: S&P, Moody's and Fitch gave no indication of the energy company's financial trouble until just days before Enron filed for bankruptcy in 2001. They have been under scrutiny for giving high, "investment-quality" ratings to unworthy mortgage-backed securities.

• They were criticized for their favorable pre-crisis ratings of insolvent financial institutions like Lehman Brothers, as well as risky mortgage-related securities that contributed to the collapse of the U.S. housing market in 2008.

• In 2009, Moody's issued a report titled "Investor fears over Greek government liquidity misplaced"; within six months, the country was seeking a bailout.

• S&P's sovereign debt team miscalculated US debt by as much as $2tn when it downgraded America's credit rating in August 2011.

Time therefore to rate the rating agencies rather than falling prey to panic on account of observations made by these agencies. India must take note of concerns voiced by them but not allow the verdict to ruin an already fragile sentiment.