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23th December 2023 (8 Topics)

Credit ratings: the Government view

Context:

The government has criticised the ‘opaque methodologies’ used by the major global credit rating agencies to arrive at sovereign ratings.

Critique of Credit Rating Methodologies

  • Opaque Assessments: Finance Ministry criticizes credit agencies for opaque and discriminatory methodologies favoring developed economies.
  • Issues with Fitch Assessment: Highlighted concerns include reliance on foreign ownership, non-transparent expert selection, and unclear parameter weights.
  • Impact on Developing Economies: Critique suggests developing nations face challenges in earning credit upgrades due to subjective assessments and arbitrary indicators.

Significance of Sovereign Ratings

  • Creditworthiness Definition: Sovereign ratings indicate a government's creditworthiness, influencing global investors and determining borrowing costs.
  • Economic Implications: Lower ratings raise borrowing costs for governments and businesses, hindering economic growth and development.
  • Developing Country Dilemma: Developing nations, rich in resources but capital-poor, struggle with poor ratings limiting their ability to borrow effectively.

Government's Methodological Criticism

  • Subjectivity Concerns: Finance Ministry questions the reliance on qualitative overlays and subjective assessments in credit rating methodologies.
  • Weighting Issues: Criticism highlights lack of transparency in conveying assigned weights for parameters, hindering a clear understanding of the assessment process.
  • Governance Indicator Controversy: Government challenges the excessive reliance on the composite governance indicator, arguing for a fairer and objective assessment approach.
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