Over-Reliance On Qualitative Factors In Credit Ratings Hurts Developing Nations: CEA V Anantha Nageswaran

In a bold move, the office of the Chief Economic Advisor (CEA) in the Union Ministry of Finance has advocated for urgent reforms and enhanced transparency in the sovereign credit rating process.

The CEA's office as reported by Indian Express, contends that methodologies employed by major rating agencies, including Fitch, Moody’s, and S&P, are unfairly biased against developing nations like India, primarily due to what it deems as an "over-reliance" on non-transparent and subjective qualitative factors.

The CEA's stance is outlined in an essay titled 'Understanding a Sovereign’s Willingness to Pay Back: A Review of Credit Rating Methodologies,' featured in the book 'Re-examining Narratives.'

Notably, the preface of the book has been authored by V Anantha Nageswaran, Chief Economic Advisor, and Rajiv Mishra, Senior Advisor, Ministry of Finance.

The CEA's office argues that the current methodologies place undue emphasis on subjective qualitative parameters, potentially hindering developing sovereigns' access to capital markets and their ability to borrow at favorable rates.

To address these concerns, the essay recommends a shift towards evaluating a country's 'willingness to pay' based primarily on its debt repayment history.

According to the CEA's office, a nation that has consistently met its external debt obligations demonstrates a robust 'willingness to pay,' making its repayment history a more reliable indicator than the current reliance on qualitative information.

Furthermore, the CEA's office criticizes the opacity in the methodologies used by rating agencies, calling for greater transparency and reforms in the credit rating process.

The essay argues that the subjective perceptions about governance and institutional strength wield disproportionate influence compared to other macroeconomic fundamentals in determining credit ratings for developing economies like India.

The CEA and his team conclude by urging CRAs (Credit Rating Agencies) to share their detailed database of best practices with the countries they rate, fostering a two-way obligation for transparency and cooperation in the pursuit of improved creditworthiness.