RATING METHODOLOGY FOR GOVERNMENT SUPPORT
Introduction
The stand-alone rating of government owned entities (GOEs) may be altered by Infomerics based on the extent and probability of support that the government can provide to them. GOEs are generally classified into four categories based on their role and the wider implications that their probable default can have on the government.
Importance in Government policy
Infomerics assesses the importance of a particular GOE in broad policy ambit of the Government. It is assessed through the following factors:
- Sector Importance: Infomerics classifies each sector as important, less important or unimportant based on its binding coefficient with the Government. The binding coefficient is determined through policy attributes including disinvestment policy, allocation of funds and consultations with Government officials.
- Strategic criticality: This is measured through the involve
Default and its fallout
The potential fallout of default by a GOE is assessed through the following factors:
- Spillover effect: This factor assesses whether default by an entity will be a localised phenomenon or it will have broad spill over effects.
- Socio economic implications of default: Factors including presence of large unions, social ramifications, amount of retail and international debt can influence the Government to bail out such entities. These factors are thus analysed in detail.
- Public support for Government backing: The role of public expectations can never be underestimated in a functioning democracy. Thus, sectors wherein public expectations are significant for government support scores high on this count.
- Declared position of the Government: The government support through various budgetary and off budgetary measures (letter of comfort, letter of guarantee, etc.) signified the importance of the GOE to the government. The spirit behind such announcements or support letters are analysed in detail.
Based on the above criteria, Infomerics classifies GOEs into four different categories:
- Low political implications of default: These entities are not notched up by Infomerics.
- Policy institutions with no spillover of default: These institution have some criticality to the government; however, they can carry out their operations even in the face of default. These are notched up by one-two notches over their standalone ratings.
- Limited political implication with high spillover of default: The ratings of such GOEs will be notched up by more than two notches over their standalone ratings.
- High political implications with high spillover of default: The ratings of such GOEs will be notched up by several notches, but the final rating will be lower than the government rating if there is no unconditional & irrevocable guarantee from the government.
In all cases when a rating factors in support from government, with an expectation of infusion of funds or any other financial support towards timely debt servicing, the name of the government along with the rationale for such expectation is mentioned. A synopsis of the above is also mentioned in the Press Release under the Analytical Approach.
