Kathmandu. Fitch Ratings, an international rating company, has warned that the recent political turmoil in Nepal could increase risks to the economic and financial landscape and affect the sovereign credit rating.
Last year, Fitch Ratings rated Nepal as ‘double B minus’ and ‘stable’. This rating was considered to be stronger than India at that time.
Fitch Ratings believes that strong external liquidity, cheap interest rates, internal and external debt burdens can offset the impact on the sovereign rating. It has pointed to the risk that the rating rating could be pressured if the political imbalance continues, complicating the formulation of economic policy.
Peace has now been restored, but the violence has curbed normal economic activity and slowed down the predetermined economic growth. This situation has demoralized both consumers and traders. Against this backdrop, Fitch Ratings also points to the risk of cancellation of scheduled tourist arrivals during the main tourist season.
The rating agency has also said that the morale of tourists is likely to increase based on the forecast that the economic impact will be normal in the medium term and there will be no unrest again. It said there were no reports of significant impact on large development projects, including hydropower projects, due to the political turmoil. This will help to withstand the pressure of economic downturn.
The impact of the upheaval on the economy is likely to be absorbed by the remittance inflow. In South Asian neighbour Bangladesh, for example, remittances increased by 80 percent during the September 2024 uprisings. However, it is not yet clear whether the same situation will be repeated in the case of Nepal.
We see a reduction in potential revenue receipts due to the unrest, as well as spending pressures from reconstruction and elections, despite the new finance minister’s commitment to address additional spending through budget controls and reappropriations, posing near-term financial risks.
Fitch expects the debt-to-GDP ratio to be around 44% for the fiscal year that ended in July. This is lower than the ‘double B’ category average of 54%.
Nepal does not have any outstanding commercial foreign-currency-based loans. Its external debt is also issued on highly concessional terms. “We believe for now that Nepal will continue to benefit from strong support from its multilateral and bilateral lenders,” Fitch Ratings said. Adequate foreign exchange reserves equivalent to the current external payments of about 12 months have also facilitated adequate external liquidity, compared to the five-month ‘Double B’ category average.
