|Let's not get so moody|
|Thursday, 02 February 2012 17:58|
Another sovereign index, this time from India
Given their dismal track record that contributed in no small measure to the global financial crisis, it’s not surprising that most countries are getting antsy when they’re downgraded by credit rating agencies like Moody’s and Standard & Poor’s. While European politicians have been talking of the need to have a European credit rating agency instead of relying on US ones, India’s Chief Economic Advisor has just come out with his own Comparative Rating Index of Sovereigns (CRIS)—the full paper on which CRIS is based is currently classified but it is likely to be available later in the year. The logic used is unassailable—if one country’s ratings don’t change while those of the others fall, that country is relatively more attractive even though the absolute ratings show no change. Though CRIS uses Moody’s ratings, it weights them with GDP growth to come to an Index. At a time when, between 2007 and 2011, India’s credit rating didn’t change, its CRIS value rose 5.1%. As a result, the finance ministry says, India’s CRIS ranking went up from 61st to 55th. Similar exercises are done for other countries and we see a much sharper fall in the PIIGS’ CRIS rankings than Moody’s rankings show!
But before you rush to embrace CRIS, the important thing to keep in mind is that investors don’t really pay that much attention to ratings anyway. Despite the fall in US ratings, investors continue to flock there; while India’s CRIS score was continuously rising, FDI collapsed in 2010 … The fact that, going by the CRIS rankings, there were 20 countries that shared the first rank, and with totally different levels of FDI, suggests too much is being made of single ratings. And going by CRIS, the fact is that China’s score rose 7.3% and Brazil 11.8% (China gets double or more of what Brazil gets by way of FDI) as compared to India’s 5.1% in the last four years. Eventually, no matter how you slice it, there’s no substitute for getting both macro and micro policy right.