Fitch Ratings revises Kerala's outlook to 'Stable' from ‘Negative'

Despite the slowdown in global trade triggered by the COVID-19 pandemic, both Kerala and the national economy have demonstrated continued growth momentum.

This resilience, coupled with sustained economic expansion, is expected to bolster the state's fiscal performance through to the fiscal year ending March 2027 (FY27).

However, it's important to note that Kerala, with its broad expenditure responsibilities and substantial infrastructure investments, may incur ongoing fiscal deficits and a gradual increase in borrowings.

Kerala's economic growth is anticipated to effectively counterbalance the mounting debt burden, ensuring stable debt ratios in the long run.

Fitch's classification of Kerala as a Type A local and regional government reflects its structural attributes, including its significant share of general government expenditure, key responsibilities in areas such as healthcare and education, as well as its capacity to manage budgetary deficits akin to a sovereign entity.

Fitch Ratings employs a comprehensive evaluation framework for Kerala, assessing the state across six distinct risk factors. These factors are categorised as 'Stronger,' 'Midrange,' or 'Weaker.' The resulting assessment yields an overall 'Midrange' risk profile for the state.

This designation is indicative of a low-risk scenario where the issuer is expected to effectively meet its debt servicing obligations through the rating horizon, extending until FY27.

The assessment takes into account potential challenges, such as a weakening operating balance, due to factors like reduced revenue or increased expenditure, as well as unexpected escalations in liabilities or debt servicing requirements.

Kerala's 'Midrange' risk profile underscores its capacity to manage potential fiscal challenges while maintaining its debt servicing capabilities, Fitch Ratings said.