In the event of a renewed slowdown in the US and Europe, the impact in India is likely to be “deeper” and “more prolonged”, since India's fiscal capacity has shrunk compared to pre-2008 levels, said Standard & Poor's Rating Services (S&P). Another global slowdown would require governments to use their fiscal capacities to support their economies and financial sectors once again, the rating agency said in a note.
“The fiscal capacities of Japan, India, Malaysia, Taiwan and New Zealand have shrunk relative to pre-2008 levels. If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one,” S&P said in a release.
S&P downgraded the US sovereign rating from AAA to AA+, with a negative outlook on Friday. The downgrade raised concerns of continuing turmoil in global financial markets, as investors re-allocate portfolios to tackle heightened risk perceptions stemming from the downgrade and the sharp fall in US equity markets last week.
On whether the action would have any impact on growth in emerging market economies, S&P analysts, in a conference call, said, “We have about 20 ratings from AAA to the default level. Hence, going from the highest rating to the next highest rating is like going from indigo to navy blue. It is not going to have immediate impact on emerging markets because the fundamental reforms they took earlier in the decade improved their external positions. Many of them are in a better shape.”
“However, the US rating change, together with the weakening sovereign credit worthiness in Europe, does point to dampened market sentiment, potential rising funding costs in offshore markets, and reduction/reversal of capital flows,” S&P said.
Prolonged market disruption could also hit highly leveraged entities seeking the rollover of debt or new funding, as the risk of refinance rising, owing to reduced liquidity, increased spreads and rise in funding costs, the report said. A reduced demand from the US could exert strong pressure on the profitability of large exporters from China, Korea, Japan, Singapore and Hong Kong. “The corporate sector would need to contend with fluctuations in exchange rates and sharp movements in input costs,” the statement said.
