Issuer Default Ratings (IDRs) affirmed at BB
By CL Jose
SYDNEY/SINGAPORE-October 16: Fitch Ratings, the international rating agency, has downgraded the ‘Outlook’ on Kerala to Negative from Stable, but affirmed the Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) at BB.
While AAA to BBB ratings are regarded as ‘investment grade’, BB to D ratings represent ‘speculative grade’ in Fitch’s rating methodology.
A rating outlook indicates the direction in which a rating may move over a medium term horizon of one to two years. A rating outlook can be ‘Positive’, ‘Stable’ or ‘Negative’. However, a ‘Positive’ or ‘Negative’ rating outlook is not necessarily a precursor of a rating change
“The revision of the Outlook to Negative reflects a weakening in Fitch’s projected debt metrics for Kerala since our last review in October 2021, despite our expectation of a continued economic recovery from the effects of the Covid-19 pandemic that started in 2020,” Fitch said in a statement.
Fitch believes the fiscal deficit of the state will persist over the medium term, leading to a sustained upward trajectory in debt and debt metrics close to the agency’s downward rating sensitivity for the ‘BB’ category over its rating-case scenario to the fiscal year ending March 31, 2026 (FY26).
Nonetheless, Fitch said state’s rating affirmation of BB reflects the expected recovery in the state economy, which will enable Kerala to regain growth momentum, supported by a rebound in tourism exports and receding risks from further Covid-19 outbreaks.
“We expect operating deficits to decline relative to revenue over the medium term, while a steady rise in debt between FY22 and FY26 will cover deficits and fund the state’s large capital spending programme as it invests to improve its infrastructure and support the economic recovery,” it further added.
Fitch underscored Kerala’s stable revenue sources, moderate control of its expenditure and ability to respond to budgetary pressure via spending cuts, and ready access to capital markets with additional liquidity support from the central government and Reserve Bank of India (RBI).
Robust revenue growth
Kerala’s robust revenue growth reflects its stable revenue sources, sound revenue growth and supportive system of federal transfers.
Fitch has attributed ‘Stronger’ to the state’s Revenue Robustness as the “assessment is reflected in the state’s operating revenue five-year CAGR of 7.2 per cent for financial year 2016-17 to 2020-21 (FY17-FY21), underpinned by solid growth in tax revenue and federal transfers.”
Kerala’s nominal gross regional product (GRP) in 2020-21 (FY21) declined by 3 per cent to Rs7.9 trillion (Rs7,90,000 crore), the first contraction since 1969.
However, the agency noted that the state’s economy is showing strong signs of a recovery with estimated GRP growth of around 13 per cent in FY22. “We expect continued economic growth over the medium term will underpin stable revenue growth for the state,” it said.
Interesting observation
Fitch may not be aware of the brewing controversy between the state and the Centre about the off-balance sheet borrowings made by Kerala, through KSSPL and KIIFB and its impact on the state’s borrowing programme itself.
What Fitch has to say on this: “State governments can only borrow in the domestic market, but can use state companies and lower-tier government bodies to borrow from international markets. Kerala set up Kerala Infrastructure Investment Fund Board (KIIFB) to borrow in both markets to fund its development.”
