S&P downgrades Kerala’s sub-national rating to BB-

Rating agency Standard and Poor’s on Thursday downgraded long term credit rating for Kerala to BB- from BB with stable outlook holding that it expects the state’s already-weak fiscal metrics to deteriorate significantly in the wake of the severe economic shock brought on by the coronavirus pandemic.

“The stable outlook reflects our view that Kerala will continue to benefit from strong access to domestic capital markets and liquidity support from the Indian central bank over the next 12-24 months. We envisage Kerala’s trend growth will remain healthy over the longer term, and stabilize the state’s debt burden and improve its operating balances,” S&P said in a statement.

This comes a day after S&P reaffirmed India’s sovereign rating at the lowest investment grade (BBB-) with stable outlook.

S&P rated Kerala in 2018 beginning its local and regional government (LRG) rating service in India.

Justifying its decision, S&P said the ratings on Kerala are constrained by the state’s large deficits resulting from considerable spending on socio-economic programs. “The pandemic has necessitated fiscal measures to stabilize the economy and support a healthcare response. At the same time, the state’s revenue has declined significantly due to subdued economic activity from the lockdown. We anticipate these factors will exacerbate Kerala’s already-weak budgetary performance indicators,” it added.

However, the rating agency applauded Kerala for its long-term planning, level of transparency and disclosure that compares favorably with that of domestic peers. “Moreover, Kerala remains well placed to manage the health impact of COVID-19 among Indian states given the infrastructure invested in healthcare over years. The ratings also benefit from our expectations of state-specific support from the central government in the event of financial emergency,” it added.

S&P cautioned that it may further lower the ratings on Kerala if the state’s debt burden surges significantly. “This may result from a combination of: (1) much weaker economic recovery or a prolonged pandemic, leading to a permanently weakened revenue base; and (2) expansionist fiscal policy. We may also lower the ratings if we view the erosion of Kerala’s budgetary performance to be structural and reflective of weakening financial management by the state to attain fiscal sustainability. Downward pressure would also occur if we view the Indian central government to be less likely to provide a credit-stability mechanism under a financial stress scenario,” it added.

However, if Kerala’s economic growth bounces back much faster than the rating agency expects and the state’s credit metrics improve materially from their current levels, in particular if deficit after capital account improves to stay below 25% of revenues, S&P said it could raise the rating. “This could result from a much stronger recovery of the tourism sector than we expect and a combination of stronger revenue streams under the new goods and services tax (GST) regime, higher efficiency of GST collections, and rationalization of expenditures,” it added.

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[Source: live Mint]

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