by Hari Prasad Shrestha 18 April 2023
Nepal is not known to outer Investors what its investment potentialities, risks, guarantees as Nepal has not performed sovereign credit rating by an international rating organization. Thus the trends in foreign direct investment in Nepal is uncertain, lowest in the South Asia region and investors hesitate to invest here as it received less than 50 percent of approved foreign investment.
Stakeholders have been saying that the absence of the sovereign credit rating has hugely
impacted foreign direct investment and foreign loan prospects of Nepal. A good and stable
sovereign credit rating would ascertain whether Nepal’s macro economy is on a sound footing, the policies are credible and competitive, and that its institutional, political and governance regimes are trustworthy and predictable. This will ultimately open the door for Nepal to access funding in the international capital markets, where it can borrow at comfortable rates to finance development projects.
A credit rating is a ranking of the credit risk of a prospective debtor predicting their ability to pay back the debt, and it forecasts the probability of the debtor defaulting.
There are three agencies, which are highly concentrated with global credit rating industry
—Moody’s, Standard & Poor’s, and Fitch—they have control over nearly the entire market.
These three agencies provide a much-needed service for both borrowers as well as to lenders.
They provide necessary market information that is reliable and accurate about the risks
associated with certain kinds of debt.
At the request of the country, a credit rating agency will evaluate its economic and political
environment to assign it a rating stretching from AAA grade to grade D. Obtaining a good
sovereign credit rating is usually essential if it wants access to funding in international bond
markets. A and B grades indicate riskless investment whereas C signals speculative investment with less risk, but D means risky investment.
Among South Asian countries India, Pakistan, Bangladesh and SriLanka have only performed their credit ratings and Nepal, Bhutan and Afghanistan in the region yet to perform the rating process.
In the budget speech for FY 2020/21, Finance Minister Dr Yuva Raj Khatiwada had said that the credit rating of Nepal would be completed within the next six months. The Ratings Oversight Committee, formed under the coordination of the Revenue Secretary of
the Ministry of Finance (MoF) had given the task of Nepal’s credit rating to the US-based
company. Fitch Ratings, assigned for the sovereign credit rating of Nepal by preparing an
action plan for conducting credit rating within six months of the next fiscal year. But the rating work is still on hold after the government could not allocate resources for payment to the rating company and some other reasons.
A sovereign rating of Nepal is a must, for which the government should immediately start
without having further delay and payment for the rating company should not be a subject to hold the rating of the state. For the confidence of Investors, Nepal must perform sovereign credit rating by an international agency. Based on the rating, the most influential factors for foreign investors when choosing a country for investment are: unhindered access to customers both at home and abroad; political stability; Impartial implementation of the rule of law; Independent judiciary; adequate infrastructure; sound regulatory regime; competitive tax regime; quality of labor; control of corruption; transparency in decision making. During the process of sovereign rating, the agency will collect information on several aspects of political, socio, economic and many other areas from international organizations like the IMF, World Bank, ADB, Bank for International Settlement, WTO, OECD, United Nations, WHO, Transparency International, Human Rights Watch and the like. It would equally emphasize information on doing business, consistency and continuity of economic and other policies, financial crimes and status of risk, along with political stability, rule of law, corruption and good governance as well.
Credit rating could be done at a state level as well as at a corporate level too. A good credit
rating improves credibility and indicates a good history of paying back loans on time, it helps banks and investors decide about approving loan applications and the rate of interest offered. Sometimes, the terms credit score and credit rating are used interchangeably, but they are different things. As mentioned above, a credit rating is used to ascertain the creditworthiness of a business or a company rather than individuals. This essentially means the probability of them defaulting on payments. The rating is usually shown as a series of alphabetical symbols from AAA grade to grade D and it is calculated using corporate financial instruments.
A credit score is also done for individuals, it is a number, usually between 300 and 900, that is given to individuals to rate their creditworthiness. It is calculated by credit institutions based on the person’s credit information report, and plays a role in determining whether or not they are approved for loans and credit cards.
Lenders as well as investors can make reliable and more sound investment decisions by
considering the risk of the entity who is borrowing the money. When lenders know the credit rating of potential borrowers, they can be assured that their money will be paid back in time, with interest. For borrowers, when companies have a higher credit rating, they will be seen as lower risk and therefore get loan applications approved more easily.
Lenders like banks and financial institutions will also offer loans at a lower interest rates for
entities that have a higher credit rating. At the corporate level in Nepal, about half a dozen
banks and financial institutions have borrowed billions of rupees in loans from foreign financial institutions over the last few years.
Credit rating not only helps foreign investors to evaluate the risk of the country or a borrower either to invest or issue credit to it, but it also offers an opportunity to review the progress and shortcomings in various aspects of the economy. This would compel the receiving country to carry out necessary reforms to make sure that it has a good credit rating.
In order to perform evaluation of the country’s credit worthiness, the government must maintain a high level of transparency in data related to the economic and financial indicators of the country as the global rating company relies on these for assigning the rating. If the grade is low, the government has the right not to disclose it but has the chance to correct the weak areas.
Nepal certainly lacks resources for its development projects and productive sectors. It needs additional financial resources from external investors as its internal sources of revenue are very limited, not enough for recurrent expenditure too. For its rapid development and transformation of the economy, it needs to attract external loans and foreign direct investment, performing sovereign credit ratings by international rating agencies. It would not be in favor of the nation delaying the rating process for a longer period citing this and that problem any more