S&P affirms Kerala's 'BB-/B' rating, gives outlook stable to state

Deficits resulting from spending on socio-economic programmes constrain ratings for the state: Agency

Global rating agency Standard and Poor’s (S&P) has affirmed 'BB-' long-term and 'B' short-term issuer credit ratings for Kerala.

The outlook remains stable on the view that Kerala will continue to have strong access to domestic capital markets and liquidity support from the central government and the Reserve Bank of India, said S&P in a statement.,

It affirmed 'BB-/B' ratings on Kerala Infrastructure Investment Fund Board (KIIFB), saying the outlook is stable.  

Kerala's weak fiscal metrics will likely improve gradually as its economy recovers from the impact of Covid-19. The state's fragile recovery will keep deficits in its after-capital account at more than 25 per cent of adjusted total revenue.

Kerala's large deficits resulting from spending on socio-economic programmes constrain the ratings for the state. The pandemic had necessitated fiscal measures to stabilize its economy and support the healthcare response.

However, the state's is improving as the economy recovers. In particular, the tourism sector has shown positive traction. This will likely alleviate the budgetary pressure and gradually strengthen the economy over the next four to five years, S&P said.

Kerala's satisfactory financial management supports the recovery momentum. The state's long-term planning and level of transparency and disclosure compare favorably with those of domestic peers. Despite the state's large number of infections, Kerala has managed the health impact of Covid-19 better than domestic peers due to the healthcare infrastructure it has built over the years.

S&P Global Ratings forecasts India's GDP will grow by 7.3 per cent this year. Kerala is expected to recover in line. Covid-19 and uncertainties from resurgent waves have immensely shocked the state's economy. As demand for domestic tourism recovers, its revenue should start to improve. The growth is expected to take off in fiscal 2023 (year-end March) as the economy opens up.

"As the state's own revenue rises in tandem with the economic recovery, we expect operating deficits to gradually drop to about 6. 5 per cent on average in 2022-2024. Its after-capital-account deficit could average about 38.5 per cent of total adjusted revenue over the same period, after spiking to 49. 6 per cent in fiscal 2021," said S&P.

Kerala's underdeveloped infrastructure and high demand for public services will continue to constrain its ability to substantially improve budgetary performance to below 25 per cent over the next two to three years, it said.