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Rediff.com  » Business » Corruption, policy uncertainties pose credit risk in India: S&P

Corruption, policy uncertainties pose credit risk in India: S&P

February 01, 2012 17:27 IST

The perceived notion about growing corruption and the policy uncertainties have increased the country-specific credit quality risks for the companies in India, global rating agency S&P has warned.

As per Standard and Poor's (S&P), the country-specific risks have increased in India in the past two years, making it harder for the companies to manage their cash flows, make their long-term strategies, and proceed with investment plans.

"In India, the government is engaging with the industry to address policy issues, but we have yet to see any significant positive actions," it added.

However, the creditworthiness of large companies in India and other parts of South Asia is strong enough to withstand the impact of demand slowdown, rising costs and other country-specific risks, it noted.

On the other hand, many of the smaller companies in this region are not on a similar footing and their credit quality faces the risk of deteriorating in such a scenario.

"The outlook on most of the companies that we rate in South Asia is stable," Standard & Poor's credit analyst Mehul Sukkawala said.

"These companies are generally large in their respective markets and have diversified operations, experienced managements, and strong financial resources. This should help them sustain their credit profiles," Sukkawala added.

S&P believes liquidity for companies it rates in the region "will remain adequate to strong because of companies' large cash balances, strong banking relationships, and access to capital."

According to a S&P report titled "Increased Country Risk And Reduced Demand To Test Most South Asia Companies In 2012", large companies in India, Pakistan, and Sri Lanka are strong enough to withstand the effects of a slowdown in demand and a rise in input costs and country risks.

However, the credit quality of a large number of their smaller peers is likely to deteriorate.

The rating agency however, cautioned that South Asian companies are vulnerable to any further weakening in domestic demand in 2012 as "their respective governments have limited capability to provide a fiscal boost in the face of a domestic or global crisis", it said.

The report notes that country risk has increased in Pakistan as well in the past two years.

The rise in risk in India is due to a perceived increase in corruption and uncertainty in policies, while, political turmoil and an energy crisis have raised country risk in Pakistan.

Sukkawala further added that "we expect new capital expenditure commitments to continue to slow down in South Asia, with the exception of Sri Lanka. The slowdown is most intense for projects in the electric utilities, and metals and mining sectors."

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