CareEdge enters sovereign ratings biz with eye on emerging market issues

CareEdge Executive Director Revati Kasture and Chief Economist Rajani Sinha both said their framework did not differentiate between developed and developing economies on any parameter.

India's CareEdge Ratings is set to enter the sovereign ratings business, with a focus on capturing the intrinsic features of emerging market economies. The global sovereign ratings market is currently dominated by names such as S&P Global, Moody's Investors Service, and Fitch Ratings, and CareEdge will join their ranks at a time when the Indian government is trying to counter recent assessments made by these global agencies.

"If you assess the landscape of agencies doing sovereign ratings, then there are top three ratings agencies based out of the US. There is an agency in Japan. However, if you look at the Global South, there is no one at all," Revati Kasture, an Executive Director at CareEdge Ratings, told Moneycontrol.

Also Read: Moody's defends India political risk comment, says had to explain change in assessment

CareEdge, the second largest ratings agency in India and among the top 10 in the world in terms of the number of rated entities, launched its sovereign risk assessment framework last month. While Kasture said it would be premature to say exactly when its ratings would be made public, she clearly sees a tipping point that requires a new perspective when it comes to sovereign ratings.

"What's happening across the world is something significant… The consolidated GDP of emerging economies will be about 45 percent of global GDP by 2028. Also, government debt of the emerging economies will rise to 34 percent of global government debt in 2028 as these are economies that are in the investment phase," she said.

"So, we felt the global landscape in terms of the mix between emerging and developed economies is changing – and it's changing significantly. But when we look at the benchmarks, most of them have evolved in the developed economies and are then applied to the rest of the world."

Emerging market nuances

By their own admission, CareEdge is not trying to reinvent the sovereign ratings wheel.

"Our methodology, in many ways, is similar to some of the existing methodologies. But we have modified it wherever we felt there was a gap, wherever we felt the dynamics are not getting fully captured," said Rajani Sinha, CareEdge's Chief Economist.

Sinha said there were some nuances and peculiarities specific to emerging economies that were not captured well by global rating agencies' methodologies. These include the investment-to-GDP ratio, which is a primary factor in CareEdge's sovereign risk assessment framework as it is a key determinant of an economy's future growth potential.

"If an emerging economy's debt is high, it probably is for capital formation. On the other hand, if debt is high for a developed economy, it might be for consumption," Sinha explained.

Also Read: Fitch sees India doing all it can to cut fiscal deficit to 4.5% by FY26

Other key differences in CareEdge's methodology from that of the global rating agencies include making the size of an economy – or nominal GDP – a primary driver and considering per capita income in Purchasing Power Parity (PPP) terms instead of US dollars.

"We felt that per capita income in PPP terms is a true reflection of the actual standard of living. So, while per capita income may be lower in some of emerging economies, the cost of living could be lower. When you take into account the actual cost of living, that gives a better indication of the social expenditure requirements of the government," Sinha said.

Government vs global agencies

CareEdge's entry into the sovereign ratings business comes amid a seemingly growing rift between the Indian government and the three global rating agencies – S&P, Moody's, and Fitch – with whom its relationship has been rather fractious in recent years. In fact, the Economic Survey for 2020-21 contained an entire chapter ("Does India's Sovereign Credit Rating reflect its fundamentals? No!") accusing the three of being biased against emerging giants such as India and China.

However, Kasture and Sinha both asserted that CareEdge's framework did not differentiate between developed and developing economies on any parameter. Taking per capita income as an example, Sinha said their framework was not creating separate buckets for developed and emerging economies. As such, the edge here was very much in favour of developed economies – and would be for several decades no matter how well a developing country manages its policies or debt.

"The idea is not to enhance ratings of emerging economies. The idea is to enhance the methodologies to pick up nuances that are important and may have been overlooked or not been given adequate importance," Kasture said.

"We want to create a framework that is robust and applicable across the world. What ratings emerge out of the framework is only from the application of the methodology," she added.

Rankings and credibility

The government's criticism of global ratings agencies has continued, with a paper by Sanjeev Sanyal, member of the Economic Advisory Council to the Prime Minister, hitting out at the "serious” methodology problems plaguing the computation of perception-based indices – such as Freedom in the World Index and the Economist Intelligence Unit (EIU) Democracy Index – that feed into sovereign ratings via the World Bank's World Governance Indicators.

US-based Freedom House has given India a score of 66 out of 100 and tagged it 'partly free', while the EIU 2022 Democracy Index ranked India at 46 and classed it as a 'flawed democracy'.

Sanyal, incidentally, was present at the launch of CareEdge's sovereign risk assessment framework in August, where he said it was "utterly absurd" that India was rated at the lowest rung of the investment grade ladder by global ratings agencies.

When asked if CareEdge had been in conversations with the government regarding its framework, Kasture said the broad methodology was discussed with Sanyal prior to the launch.

"We will definitely get into in-depth deliberations and discussion at some point because we are currently fine-tuning our matrix and the more inputs we get from different people, we will be able to refine it better. So, our endeavour will be to reach out to a lot of people, including those in the government, for their insights," Kasture said.

At the same time, CareEdge will utilise the World Governance Indicators to score countries under its 'Institution and Quality of Governance' category.

"I understand the Indian government does not subscribe to some of these rankings. But is there any other credible source of information that gives us relative rankings across the entire set of countries? If the answer to that is yes, we will be happy to engage and work with such providers," Kasture said.

Despite the many narratives at play, the endgame is straightforward as far as CareEdge is concerned.

"All we want is for a credible framework to emerge out of India; a framework that can be relied upon by global investors," Kasture said.