New Delhi: Forecasting that India will clock the highest growth rate of 7-7.5 per cent among G20 economies in 2015 and 2016, Moody's Investors Service said the country is less exposed to external shocks, and the positive rating outlook reflects resilient growth and reforms momentum.
"India is less exposed to global risks because of its more resilient economic growth and the impact of positive policy reforms momentum," the rating agency said. Emerging market sovereigns have diverging shock-absorption capabilities to withstand the risks that will continue to impact global credit quality in 2015-16, says Moody's in a report published on October 22.
The report focuses on five Baa-rated sovereigns -- Turkey, Brazil, South Africa, India and Indonesia. "India is less exposed to external shocks than the other sovereigns discussed here. The positive outlook on its Baa3 rating reflects our view that the relatively resilient growth and the policy reform momentum will slowly stabilise inflation, improve the regulatory environment, increase infrastructure investment and lower government debt ratios," it said.
In the report titled 'Baa-rated Sovereigns: Diverging Resilience to Developing Global Risks', Moody's believes the main external risk facing EMs is the potential for a prolonged risk aversion, prompted by hopes of normalisation of US monetary policy and possibility of a sharper-than-expected China slowdown.
It also talks of country-specific challenges exacerbating this external risk. "In contrast, we forecast strong growth in India of around 7-7.5 per cent per year in 2015-16, the highest among the G20 economies, which is supported by lower oil prices that will reinforce gradual growth-enhancing reforms," it said.
Moody's said although India, South Africa and Brazil have weaker fiscal positions than Turkey and Indonesia, these governments are less reliant on foreign currency and non-resident funding (government external debt). The rating agency made a special mention of India's significant monetary tightening in 2013, coupled with some fiscal consolidation, which is "an example of effective macroeconomic management that restored macroeconomic stability, albeit at the expense of near-term growth".
"However, coupled with structural reforms to address regulatory and infrastructure weaknesses, lower inflation and current account deficit outcomes have set the pace for monetary loosening which commenced in 2015. This active policy response to counter emerging risks contributed to the positive outlook," it said.
Acknowledging that foreign participation in the domestic debt market provides additional source of financing and reduces sovereign yields, Moody's said it may at the same time transmit global financial shocks to local-currency sovereign bond markets and increase yield volatility.
"Credible and effective macroeconomic management can stabilise capital flows... If macroeconomic repair is coupled with longer-term structural reforms such as improved regulation and governance, the sovereign credit profile benefits from the ensuing competitiveness gains," the rater said.
Turkey and Indonesia have fiscal profiles that compare favourably to the Baa median and are stronger than those of India, Brazil and South Africa. According to the report, the trends in global capital flows have caused Brazil and Turkey to register the sharpest exchange rate depreciation and loss of reserves in the first half of 2015 while India proved comparatively resilient to these market developments.
Overall, Turkey stands out as most vulnerable to external risks because of its high reliance on external capital and large stock of external debt due annually combined with heightened political risks. While Brazil is less reliant on external capital, it has already experienced significant financial market turbulence because of the country's weak growth outlook, ongoing deterioration of its fiscal metrics and challenging political landscape.
South Africa and Indonesia are primarily exposed to financial market turbulence through their trade links with China and a period of low commodity prices. "If Chinese growth is slower than expected, this could delay both countries' cyclical economic recoveries and affect capital flows," Moody's said although both countries have adequate resources to meet their needs in periods of adverse market conditions.
