Understanding Standard and Poor’s Criteria for Sovereign Ratings

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Presentation transcript:

Understanding Standard and Poor’s Criteria for Sovereign Ratings

The current crisis in Europe has brought into the spotlight sovereign creditworthiness and highlighted the ongoing task of credit ratings agencies in assessing this issue. Sovereign government bonds are issued globally and it is imperative that investors have globally recognized and consistent benchmarks to guide their investment decisions.

There are 3 major credit rating agencies known as Moody's, Standard and Poor's(S&P) and Fitch. They account for 90% of the market. The focus will be on Standard & Poor's to explain their criteria on sovereign ratings. The list of the criteria is as follows:-

1) Institutional Effectiveness and Political Risks: If the judiciary, the executive and the legislature along with scores of other institutions such as CAG, Election Commission, Police, and Defense etc. are robust. Political risk is a reflection of government stability that indicates whether the government is enjoying reasonable confidence in both the Houses of Parliament and whether it is expected to last its complete term.

2) Economic Structure and Growth Prospects: This looks at economic growth and future potential. It may also analyze the debt to GDP ratio and several other financial ratios to arrive at the health of the economy.

3) External Liquidity and Internal Investment Position: The focal point is whether FIIs are considering India as a good destination for investment, whether FDI money is coming in and whether the domestic investment scenario is good.

4) Fiscal Performance and Flexibility: This focuses on if the fiscal deficit is under control, whether budgetary management is professional, and if the aid being offered by the government has any basis or not.

5) Monetary Flexibility: If the RBI is robust in its performance, if it regulates money supply according to the need, whether inflation is being kept under check, and what the expectations are going forward.

Source: Understanding Ratings: Standard & Poor's Rating Services http://img.en25.com/Web/StandardPoorsRatings/Sov_Default_2011.pdf

Please give us your feedback at Hope you have understood Standard and Poor’s criteria for sovereign ratings Please give us your feedback at professor@tataamc.com

Disclaimer The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.