What ‘BB-’ rating means for Nepal

Nepal has received its first-ever sovereign credit rating of ‘BB-’ from the global agency Fitch. The rating agency has assigned Nepal a Long-Term Foreign-Currency Issuer Default Rating (IDR) of ‘BB-’ with a stable outlook. The rating reflects the country’s financial stability, potential for growth, and areas requiring improvement, say experts.

The rating places Nepal above many South Asian nations, except India, which holds a two-notch higher BBB- rating. While categorized as speculative, the rating signals moderate economic stability and future growth potential for Nepal. Experts view the outcome as better than anticipated for Nepal’s first credit evaluation.

The ratings reflect Nepal’s low and highly concessional government and external debt burdens, strong external liquidity and solid growth prospects underpinned by the hydropower sector. “This is balanced against an underdeveloped economy that is vulnerable to external shocks and natural disasters,” the rating agency said. While Nepal’s GDP per capita and governance metrics are well below the 'BB' median, Fitch said it has been improving since the end of the armed conflict in 2006 and the subsequent political transition.

Nepal’s public debt, which is at around 44 percent of GDP, is below the forecast ‘BB’ median of 55 percent. Fitch has noted that Nepal’s non-financial contingent liabilities appear limited, while provinces currently have no debt and the bulk of state-owned enterprise debt is on-lent from the government. Likewise, Nepal’s robust foreign currency reserves, supported by remittances, provide a solid financial foundation, it added.

The positive rating is expected to create new opportunities for Nepal. First, having a sovereign credit rating will enable Nepal to issue bonds in the international market, which will pave the way for financing large infrastructure projects. Second is, the rating, albeit speculative, reassures potential investors that Nepal holds promise if necessary reforms are implemented. Third is the scope for improvement. Experts believe this rating provides a benchmark for future progress, as regular reviews allow Nepal to work toward higher grades.

There are challenges as well. Experts say the rating reflects moderate risks in its economic environment. Low revenue generation, increasing public debt and inefficiencies in regulatory frameworks could make potential investors cautious. Another important challenge is political stability. Frequent changes of government hinder policy stability, affecting economic and financial governance.

To improve its rating and attract more investments, the government needs to ensure political stability and policy continuity. A lack of policy stability has often led to disruptions in implementation of projects and programs and made potential investors reluctant to commit funds in Nepal. The government needs to undertake comprehensive reforms to strengthen its financial foundation. Modernizing revenue collection, expanding the tax base and putting in place more efficient tax administration processes are some of the measures that the government needs to take. 

Likewise, public deft requires management through a well-defined strategy. Further, the government must focus on improving capital expenditure execution, which has consistently fallen short of targets, and ensure borrowed resources are utilized more efficiently for productive investments rather than recurrent expenses.

The government also needs to make its market oversight more effective. Empowering financial sector regulators with better enforcement capabilities, modernizing supervision methods and improving coordination among various regulatory agencies are some of the things that the government must undertake. 

This would not only boost investor confidence but also help in creating a more transparent and predictable business environment that international investors seek.