Sovereign rating

Sovereign rating

Subject: Economy

Section: External Sector

Context:

There is a danger that we may witness a drop in WGI scores due to the latest negative commentary on India by think tanks, survey agencies and international media. This could possibly downgrade our Sovereign Ratings to junk

Sovereign Credit Rating:

• A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign entity.
• It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.
• In addition to issuing bonds in external debt markets, another common motivation for countries to obtain a sovereign credit rating is to attract foreign direct investment (FDI).
• At the request of the country, a credit rating agency will evaluate its economic and political environment to assign it a rating.
• S&P gives a BBB- or higher rating to countries it considers investment grade, and grades of BB+ or lower are deemed to be speculative or “junk” grade.
• Moody’s considers a Baa3 or higher rating to be of investment grade, and a rating of Ba1 and below is speculative.
• A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
• Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of global ratings business.
• In India, there are six credit rating agencies registered under Securities and Exchange Board of India (SEBI) namely, CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

Factors determining:

A country’s sovereign rating is based on subjective factors such as assessments on governance, political stability, rule of law, corruption, press freedom, and so on. Credit agencies use the World Bank’s World Governance Indicators (WGI) as a proxy for these subjective factors.

A downgrade implies:

Being downgraded can have a big impact on a country’s ability to borrow money on the markets. Investors see it as a riskier bet and demand higher returns to lend to governments. Even if it manages to raise any funds, it will come at exorbitant cost.