Nepal | May 23, 2019

Nepal lags behind in structural and governance indicators despite being good on macroeconomic front

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Sujan Dhungana

In a bid to ease the process of attracting foreign investment to bridge the funding and investment gap, the government is preparing to rope in renowned international rating agencies to confirm the country’s sovereign credit rating, which will determine the risk of doing business in Nepal. As such rating reflects the confidence of the country’s business environment, it is crucial for a country to have such rating, experts say. Sujan Dhungana of The Himalayan Times caught up with Stephen Schwartz, head of Sovereign Ratings Asia Pacific of Fitch Ratings, a globally renowned credit rating agency, to know about such credit ratings, its usages and Nepal’s readiness for it. Schwartz was here in Nepal to participate in the two-day Nepal Investment Summit, which concluded on March 30. Excerpts:

How do you find the business environment in Nepal?

This is my second visit to Nepal. I was here a year back to attend the Blended Finance Conference and this time I was interested to see what the mood on the ground was in Nepal, especially in terms of political stability and other business-related issues. I am encouraged to see the increased enthusiasm among investors in the country. Political stability and macroeconomic stability are aspects that should not be taken for granted as they are vital for economic growth. I found that people were ‘positive’ about improvement. A recent report of the International Monetary Fund flagged the growing state of Nepal’s economy. However, the report also carries some macroeconomic challenges. The IMF has flagged the growing fiscal deficit of the country but it is manageable. All these are issues of macroeconomic management that any fast-growing economy will face. So, it requires careful monitoring from the regulatory agencies and the government. Thus, Nepal is creating a buzz among business communities across the world.

Nepal still does not have a sovereign country rating. What is the impact of not having such a rating for a nation?

Sovereign rating is the assessment of the creditworthiness of a government and country to issue debts. Nepal is not yet in the stage of issuing its own bonds in the international market. Developing countries have access to concessional financing from multilateral vendors. These countries still do not have a strong presence in the international bond market. Nevertheless, sovereign rating is sometimes used by a country to attract foreign investors by giving investors a benchmark of how the country’s creditworthiness compares with other peer countries. When countries are looking to invest in other low-income nations they want to know about the creditworthiness of the concerned country. This is where credit rating could be useful but Nepal is not yet there. Once Nepal is ready for conducting the sovereign credit rating, credit rating agencies like us will be ready to provide a framework for assessing the four pillars that we look at — macroeconomic performance, public finances, external finances and structural factor.

Many countries, particularly developing ones, that have not done their sovereign rating are initially reluctant to carry out such ratings. Can you share your experience on why countries are reluctant to have sovereign credit rating?

It is a mixed experience as not every country is reluctant towards going through sovereign rating. A few years ago we had done the sovereign credit rating of the Maldives along with Uzbekistan, which are developing countries and also landlocked like Nepal and shares economic features similar to Nepal. But it is true that not every country is ready for sovereign credit rating. Naturally, a government wants to know what its rating level would be and we also encourage countries not to rush into the credit rating process and go for it only once they are ready. This is because once a country gets a rating they want to not only maintain the rating but want the rating level to go up over time along with growth in per capita income and as the country becomes financially stronger. Countries are reluctant towards sovereign credit rating because they are not ready to enter into this process. Sovereign credit requires providing data, engaging in dialogue and providing information about budget policies. Investors like to see credit rating because it is a symbol of transparency and a government’s readiness and confidence towards welcoming foreign investments and businesses.

You just mentioned about the four matrices that Fitch depends on while rating countries. Can you say where Nepal stands based on these matrices?

We have not done any evaluation of Nepal and are currently relying on reports from third parties like IMF and the World Bank. Fitch does not have its own independent view on Nepal’s position in the aforementioned four matrices for credit rating. But the recent assessment of the World Bank, IMF and others and from my two-day experience at the Nepal Investment Summit, Nepal is comparing relatively well with its peers on macroeconomic indicators like growth and inflation. Where Nepal lags behind is in structural indicators, meaning low level of per capita income, which will take a very long time for Nepal to improve. Similarly, Nepal also lags behind in governance indicators. We use the World Bank’s governance indicator and they rank countries in six indicators. We also look into ease of doing business but this does not enter directly into our rating process as ease of doing business is more a qualitative factor. On public finances, Nepal has a low public debt ratio compared to other countries. At this moment Nepal’s fiscal deficit and its current account deficit are relatively higher compared to other countries. If you look at countries like Vietnam, they have been very successful in their economic progress. Many external factors are in direct control of policymakers. Likewise, political stability is vital as it creates a foundation for macroeconomic stability.

So, is it an appropriate time for Nepal to carry out a sovereign country rating?

This is completely related to the government. If it expresses its interest, we are ready to engage in discussion on how we do ratings and the timeline. However, the government should understand what is required to go for sovereign credit rating before actually going for it. Nepal does not need to issue bonds in the international market. From this sense, such ratings will help Nepal to draw foreign investment in the future. While I mentioned that a country should not rush for sovereign credit rating, I meant that a government needs to be confident that it has data and information to share with the outside world. Similarly, the government should be ideally confident on maintaining the ratings.

As the government is witnessing some pressure in the external sector position lately, how do you think can Nepal balance the high-growth trajectory and pressure?

If the government wants to see economic growth at the pace that it is aiming, it needs to work on supply-side constraints. When growth is high, imports go up creating pressure on the external sector. The government needs to find a sustainable financing source. One of the healthy elements of financing the current account is foreign direct investment. Instead of relying on short-term money flow, it is important for Nepal to draw investments.


A version of this article appears in print on January 01, 1970 of The Himalayan Times.


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