Nepal Should Improve Its Credit Rating

In this day and age, countries around the world are interdependent. Globalisation has brought these countries closer and closer so much so that the entire world has become a global village. Trade, investment, financial aid and so on between countries have been the hallmarks of the modern world. When one country wants to invest in other countries, the country does not invest there haphazardly; rather, the country often keeps itself updated about various aspects such as creditworthiness. It is here that sovereign country ratings come in handy. An independent assessment of the creditworthiness of a particular country, sovereign credit ratings enable investors to know or understand the level of risks their investments are exposed to. 

A sovereign credit rating is the evaluation of a country’s ability to pay back its debt. In other words, its indicates a particular country’s solvency status. There are several credit rating agencies in the world. Among them, Fitch Ratings, Standard and Poor’s and Moody’s are the most prominent. Others include Scope Ratings, China Chengxin International Credit Rating Company and Japan Credit Rating Agency. A credit rating is usually conducted for an entire country. Small areas such as municipalities, districts or provinces are not assigned credit ratings. 

Risk classifications

The Organisation for Economic Cooperation and Development (OECD) also publishes country risk classifications so that it can obtain necessary data from member countries. The international organisation aims at promoting sustainable economic growth, bolstering free markets and promoting the efficient use of resources. The organisation plays a pivotal role in the development of its member countries as well as non-member countries by developing policy standards, helping counties reap the benefits of a global economy and helping countries overcome the challenges posed by a global economy. 

Credit ratings are beneficial for developing and poor countries as they need foreign direct investments and access to funding in the international bond market. Sovereign credit risk is reflected in credit ratings. This measures a government’s ability or willingness to meet is debt obligations down the road. Many countries seek sovereign credit ratings from prominent credit rating agencies so as to boost the confidence of investors so that they can attract foreign direct investments and global assistance to embark upon development projects. 

There are several factors that determine how risky investments may be in a particular country: the debt service coverage ratio, growth in domestic money supply, import ratio and variance of export revenue. The riskiness of investments may also depend on that country’s economic and political environments. Political instability may often make foreign direct investments unsustainable. Likewise, an economically underprivileged country may find it heavy going to service the external debt.  

Credit ratings may be affected by financial factors. A global financial crisis emerged in 2008, affecting the world economy. Many countries faced sovereign credit risk. The crisis was so severe that bailing out the affected countries was globally discussed. Some credit agencies were criticised for hastily downgrading the credit ratings of some countries. They were also flayed for following the “issuer pays” model. Under this model, nations pay for their ratings. Investors should, however, pay for such ratings to avoid conflicts of interest. 

Advanced countries usually have good credit ratings. The top ten countries with the highest credit ratings include Australia, Canada, Denmark, Germany, Luxembourg, the Netherlands, Norway, Singapore, Sweden and Switzerland. Each of these countries has a rating of AAA from Standard and Poor’s, Aaa from Moody’s and AAA from Fitch Ratings. Europe tops the list with seven countries. The US, the largest economy in the world, is not on the list. The USA has a credit rating of AAA from Standard and Poor’s and Aaa from Moody’s but a rating of AA+ from Fitch Ratings. Fitch Ratings downgrades the rating of the US from AAA to AA+ in 2023 owing to its rising debt and increasing brinkmanship in debt ceiling negotiations. 

What about Nepal’s credit rating? It was only as recently as on November 5, 2024 that Nepal got a long-term foreign currency issuer default rating (IDR) of BB- (BB minus) from Fitch Ratings. This is Nepal’s first sovereign credit rating. The rating of BB- shows that Nepal is among developing economies with a non-investment grade rating. The rating signifies a higher risk for investment. However, according to the Ministry of Finance, the rating shows good economic structure, public finance, fiscal management, macroeconomic stability, debt sustainability and medium- to long- term growth plans. It also indicates strong foreign currency reserves and revamped economic activity that may lead to economic growth.

Nepal's credit rating 

The credit rating of Nepal is behind India but ahead of other South Asian countries. India has a credit rating of BBB-, an investment grade rating. On the other hand, Pakistan has a credit rating of CCC+ owing to its economic and political instability. Ratings above BB+ indicate an investment grade, which means an environment favourable to investments. Ratings below BB- show a speculative grade. The highest rating denotes a prime grade (AAA), whereas the lowest rating indicates an insolvency grade (D).   

Nepal is graduating to a developing country in 2026. For this, infrastructure development needs to be accelerated. The country’s internal resources are not sufficient for this. So the country is bound to rely on foreign aid and assistance.  Projects under the Millennium Challenge Corporation (MCC) and the Belt and Road Initiative (BRI) may help in infrastructure development to some extent. But the country should woo more and more investments from foreign countries and agencies. The credit rating recently assigned to the country by Fitch Ratings is not attractive enough to woo foreign investments. The country should, therefore, make strides in upgrading its rating to at least an investment grade by improving the sectors where necessary. 

(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)