- May 10, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Section: External Sector
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.
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.
|The Worldwide Governance Indicators (WGI) project reports aggregate and individual governance indicators for over 200 countries and territories over the period 1996–2020, for six dimensions of governance:|
These aggregate indicators combine the views of a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. They are based on over 30 individual data sources produced by a variety of survey institutes, think tanks, non-governmental organizations, international organizations, and private sector firms.