Why companies are rated higher than their governments...

Aug 2, 2011

In this issue:
» India enjoys healthy receipts per tourist
» Will the Indian govt. get down to serious lawmaking?
» Signs of competition easing in Indian mobile market
» Credit downgrade risk continues to haunt the US
» ...and more!
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One upon a time, the government of any country was seen as the most solvent entity in the country. This was on the basis of its huge cash generated from tax receipts, international reserves and the ability to sell state-owned assets. But not anymore!

Years of indiscriminate spending and the global financial crisis of 2007-09 have piled up massive debt on the books of the US and European governments. So much so that risk of a default seems imminent and the possibility of a credit ratings downgrade just around the corner.

Therefore, it comes as no surprise that many multinational companies operating in highly indebted economies are attracting higher credit ratings as compared to their home governments. Take the US for instance. The last few weeks have displayed the US on the brink of a major crisis as debt default loomed large. But quite a few US multinational companies have not necessarily met with the same fate. Infact, since the crisis quite a few American companies have worked on generating high cash flows and cutting down debt. Further, the subdued economic environment in the US has meant that those companies having operations in the emerging markets have done particularly well. And it is not just the US. This phenomenon has been observed in Europe and Japan as well. Globally, 107 corporate and local governments have higher ratings than those of the sovereign in their country of domicile on a foreign currency basis according to Standard & Poor's.

Emerging market economies, meanwhile, continue to attract both investors and major corporations. Although the former are plagued with the challenges of high inflation and interest rates, they are still expected to perform much better than their developed peers. And companies headquartered in the US and Europe are looking towards these economies to strengthen their balance sheet and generate more cash. Indeed, does that then mean that corporate bond market will begin to attract more attention than the sovereign debt market? One will have to wait and see.

Do you think that investors will increasingly opt for corporate debt in the future as opposed to government debt? Share with us or post your comments on our Facebook page.

 Chart of the day
A rise in tourist arrivals is good for any country as it does its bit in contributing to the GDP growth of the country. But it is not just enough to have more number of foreign travelers visiting an economy. What also matters is the revenue that is generated per tourist. In this regard, today's chart of the day shows that India is among the top countries enjoying higher receipts per tourist. This is even more than the US, which outclasses India in terms of number of tourist arrivals.

2010 or latest available data
Data Source: The Economist

When the key decision makers in a firm quarrel amongst themselves rather than thinking about long term growth, what would you do as a shareholder? Think of exiting the firm, isn't it? Well, if Reuters is to be believed, there is a strong chance that something similar will play out over the next five weeks. The only difference being the entity that the news agency is referring to is not a firm but the Indian parliament. The monsoon session of the parliament got underway yesterday. However, given the number of controversies the coalition government finds itself surrounded with, precious little in the form of lawmaking is likely to emerge. Of course, there are quite a few important issues to address. Like the proposal to introduce a nationwide goods and services tax. And also the land and mining laws to fast track industrial projects. Cumulatively put, these laws and the like have the capacity to take India's growth towards the double digit mark on a sustainable basis. But will they see the light of the day amidst the chaotic political scenario? It will clearly take a brave soul to answer in the affirmative.

And while we are on the topic of India's growth prospects, can the country achieve double digit growth? Ask Mr Ahluwalia, deputy chairman of India's Planning Commission, and he'll tell you to "Wake up and smell the coffee." He states that double digit growth craved by government officials and industrialists is definitely out of reach. In the current political environment, even sustaining a 9% growth rate will be difficult. India is staring at a number of challenges which are expected to come to the fore over the next few years. Water shortages, a burgeoning fiscal deficit and inflationary pressure continue to dog the nation. The fiscal deficit, which is a key measure of economic health, is under pressure. Duties on crude oil have been slashed and the energy subsidy bill is gigantic. Divestments of PSU companies have been dismal, amounting to only US$ 450 m, a fraction of the US$ 9 bn projected for the year. The government has also lost face due to a number of corruption scandals. It is now refraining from making decisions, lest it gets caught on the wrong foot. Unlocking India's true potential is truly a challenge for anyone at its helm.

Mobile companies in India have seen cut-throat competition thanks to the price war that started a couple of years back. This was triggered by the entry of new operators who introduced innovatively cheap price plans. Obviously, the incumbents had to follow or they risked losing market share. It was but natural that this would eventually come to an end. When? By the looks of it, the market has started to cool off in recent times. As per Mr Sunil Mittal, Chairman of Bharti Airtel, the mobile market has started to show signs of competition abating in recent times. He has also stated that the market is now headed for consolidation. This is mainly due to the squeezed margins which has led most of the new entrants into losses. Though the gestation period for mobile operations is long, the margins have reached a point wherein they are no longer sustainable. This would force companies to look at increasing tariffs like what Airtel, Vodafone and Idea Cellular have done in recent times. The next step would be consolidation. But that would depend on the M&A norms and exit options that the government has to decide in the new telecom policy.

The 'AAA' rating seems to be sacred to the US. It is something for which the debt ridden nation is even willing to cut down on its reckless spending habit. Whether the rating will ensure that the US continues to borrow from the rest of the world at near zero rates is anybody's guess. But for the time being, the sanctity of the rating itself is being questioned. Unfortunately, the recent debt deal that cheered markets across the world does little to improve the US' deficit position. As per a Moody's report published by Moneynews, the rating downgrade remains an overhang on the US economy. The proposed spending cuts that are just half of the US$ 4 trillion recommended by S&P could lead to a downgrade for the US within as early as 6 months! Thus the Obama government has certainly postponed the debt crisis instead of resolving it. For those who are reveling in the market recovery over the false hope of debt crisis being resolved, this comes as a stern warning.

The world economy, meanwhile, remains in doldrums. First it was GDP for the US economy growing at an annualized rate of less than 1% in the first half of the year. It was followed by the global Purchasing Manufacturing Index (PMI) displaying poor numbers. The PMI in July fell to its lowest level in the last two years. The factors that have conspired together to stall output growth are supply chain problems on account of Japanese tsunami, high commodity prices and austerity measures squeezing household incomes. To make things worse, the new orders index and employment growth has contracted as well. This douses any hope of a pickup in the near term. What is worrying is that even major Asian economies like China and India are a part of the miserable trend.

The sentiment is already low on account of global manufacturing running out of steam. In this scenario, a similar outcome for a much larger services sector will be another nail in the coffin of the global economy.

The Indian stock markets have been down on global cues since early trade. At the time of writing, the benchmark BSE Sensex was down by 252 points (1.4%). All sectoral indices were trading in the red led by realty and metal stocks. Red marks were seen across Asian stock markets as well. South Korea and Taiwan were leading the losses.

 Today's investing mantra
"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies." - Warren Buffett

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6 Responses to "Why companies are rated higher than their governments..."

khalid qaisar

Aug 12, 2011

yes, beacuse the fundamentals of many companies are rock solid amid the scenario of WEAK fundas. of many countries.



Aug 3, 2011

Based on the present situations in telecom sector, Is RCOM is a good company for our fresh investment and staying with them as long as they remain good?



Aug 2, 2011

Corporations are driven by the tempo of higher quarterly performances and hence strive to show better performances. Governments are governed more by the policitical pulls and pressures of cross subsidisation, the world over. The trend will tilt obviously towards corporate debt of sound corporations rather than sovereign debt whose questionability of repayment in the near future poses a big doubt. Why can't the US government raise corporate taxes since almost all the corporations are reporting higher profits YOY?? The Republicans won't agree to this, I bet!



Aug 2, 2011

Seth (above)makes an excellent point. But a situation that needs a fundamental correction. We need a out of the box thinking to change the way the finances of teh govt are rated vis a vis a corporate entity since the nature of the two are very different.

Part of the problem of the Global Financial Crisis is due to this unfortunate linkage between troubles in private enterprise cascading into govt financial territory.



Aug 2, 2011

Well many of the Bills in the Parliament will be passed. During the previous session also many important Bills were passed in "minutes', without any debate as the main oppn. BJP walked out. The government sized the oppurtunity and many Bills were passed with out any debate. Same will happen again.
The slutwalk or "besharami" walk should have had many of the present ministers. They would have definetely represented the true 'besharmi' of Indian politics.
(No particular political affiliation.)
Thanks Damani



Aug 2, 2011

Consistancy is the major difference between MNCs and Governments.While corporates generally follow a set pattern of doing business regardless of who is at the helm of the company, Governments on the other hand can radically alter their track with the change of leadership. The change does not always go down well with the investors. QED

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