KATHMANDU, NOVEMBER 22

Fitch Ratings has assigned Nepal a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook as of November 21, 2024.

Fitch, an American credit rating agency and one of the world's "big three" alongside Moody's and Standard & Poor's, visited Nepal in September to begin an on-site assessment.

According to Fitch, the key drivers of this rating assigned to Nepal are the Low Debt; Weak Structural Factors, stable debt levels, strong debt affordability, fiscal consolidation, temporary external surplus, net external creditor position, growth recovery, Banking sector stability, and political instablity.

Key Rating Drivers:

  • Nepal benefits from low, highly concessional debt, strong external liquidity, and hydropower-driven growth but faces challenges from underdeveloped governance, low GDP per capita, and vulnerability to external shocks.
  • Federal debt was 44% of GDP in FY24, below the 'BB' median, with no provincial debt. Debt remains manageable due to concessional terms and limited contingent liabilities.
  • Interest payments peaked at 8% of revenue in FY24, with low rates on concessional external and domestic debt supported by remittance-driven liquidity.
  • The federal deficit is projected to narrow to 4% of GDP by FY26, supported by a revenue mobilization strategy and better spending execution at the local level.
  • Nepal recorded a current account surplus of 4% of GDP in FY24 due to import compression and remittance growth, boosting reserves to $13 billion, covering 12 months of payments.
  • Nepal remains a net external creditor, with a limited integration into global financial systems, minimal external private debt, and modest FDI inflows.
  • Growth is expected to rebound to 5% over the medium term, supported by hydropower exports to India, despite GDP per capita remaining low at $1,400.
  • Credit to the private sector reached 86% of GDP in FY24, backed by remittance-fueled deposits. Regulatory enhancements are underway to address risks from non-bank financial institutions.
  • Frequent leadership changes undermine long-term policy planning, though broad consensus on economic management persists.
The rating also factors in Nepal's environmental, social, and governance (ESG) challenges, with high relevance scores for political stability, rule of law, and control of corruption.

ESG scores for Nepal:

  • '5' for Political Stability and Rights
  • '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption
  • '4' for Human Rights and Political Freedoms
  • '4'' for Creditor Rights
According to Fitch, the highest level of ESG credit relevance is a score of '3',. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.

Fitch further notes that sustained governance improvements, prudent debt management, and economic reforms could lead to positive rating actions. Conversely, an increase in government debt or weakening external finances could pressure the rating negatively.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary Sovereign Rating Model assigns Nepal a score equivalent to 'B+' on the Long-Term Foreign-Currency IDR scale. Adjustments based on qualitative factors resulted in the final rating of 'BB-'.

Country Ceiling

The Country Ceiling for Nepal is established at 'BB-', consistent with the Long-Term Foreign-Currency IDR, indicating no significant challenges to external financing.