Fiscal Gap: Rating Agencies Likely to Give More Time to Government

Even though the data showed a 56 per cent exhaustion of the full year's fiscal deficit target in the first quarter, Singaporean brokerage DBS today said the international rating agencies are unlikely to get alarmed by it as yet.

"The international rating agencies are likely to be in a wait-and-watch mode as implementation of the reform agenda remains key to ensure return to sustainable growth," it said in a note.

"The agencies have put their faith in the government to meet the challenging fiscal deficit target and take a bolder stand on rationalisation of subsidies in the course of the year, when the monsoons risks fade," it added.

Finance Minister Arun Jaitley had said his administration was targeting to narrow the fiscal deficit, one of the major factors cited by the rating agencies for a possible downward review of the country's sovereign rating, to 4.1 per cent for the fiscal.

It can be noted that at least two rating agencies, Fitch and S&P, had earlier warned of a downgrade of the sovereign rating to the junk status citing a variety of factors, including the high fiscal deficit, dip in growth, high inflation and a sense of policy paralysis.

However, yesterday Fitch had reiterated its stable outlook on the sovereign with a BBB- rating. Moody's had also retained the stable outlook.

After the presentation of the Budget last month, the agencies had welcomed the resolve on fiscal consolidation but expressed reservations on the absence of details and stressed that rating revision would depend on bold reform measures.

Citing media reports, DBS said S&P is scheduled to hold consultations with the government next week, while its peers will also have similar meetings before October.

DBS also discounted the chance of an upgrade, saying the rating agencies will hold on to their stance for more time to come before taking a call.

DBS called the numbers released yesterday pointing to the exhaustion of 56 per cent of the target as "dire" and said that this is a result of lack of non-tax revenues and bunched up expenditure, which will include arrears carried forward from the previous fiscal.

To meet the stiff fiscal deficit target, it said the government will have to move ahead strongly with the divestment programme and also cut spending within the limits