Home / Front Page/ Sri Lanka balances robust growth potential with high debt burden, external risks: Moody’s

Sri Lanka balances robust growth potential with high debt burden, external risks: Moody’s


Comments / {{hitsCtrl.values.hits}} Views / Monday, 17 July 2017 01:13


Moody’s Investors Service has said that the Government of Sri Lanka’s B1 rating is supported by the economy’s robust medium-term GDP growth prospects, relatively large economy and high income levels when compared with similarly rated sovereigns.

At the same time, despite recent progress in fiscal consolidation, credit challenges include high general government debt, very low debt affordability and large borrowing requirements. Moreover, Sri Lanka’s external payments position also remains fragile. Moody’s conclusions are contained in its just-released annual credit analysis ‘Government of Sri Lanka - B1 Negative’. 

This report declares Sri Lanka’s credit profile in terms of Economic Strength as Moderate (+), Institutional Strength as Low (+), Fiscal Strength as Very Low (-) and Susceptibility to Event Risk as Moderate. 

These are the four main analytic factors in Moody’s Sovereign Bond Rating Methodology. 

 

 



In 2017, Moody’s expects real GDP growth of 4.6%, which reflects the temporary negative impact of adverse weather-related events during the first half of the year. Meanwhile, Moody’s expects GDP growth to average 5.2% per year in 2017-2021, a robust growth rate. Sri Lanka has progressed with some reforms under its three-year International Monetary Fund (IMF) Extended Fund Facility (EFF) program. In particular, revenue measures aimed at increasing taxes, such as last year’s value-added tax (VAT) rate hike and this year’s pending new Inland Revenue Reform Act, have the potential to sustainably increase Government revenues.

“Sri Lanka’s low tax efficiency and tax collection provide significant scope to broaden the tax base and increase the tax revenue/GDP ratio, which was only 12.4% in 2016,” said Moody’s Vice President and Senior Credit Officer William Foster. 

 

 



Total Government revenues are also very low, with a general Government revenue/GDP ratio of 14.3% in 2016, one of the lowest among B-rated sovereigns. Despite ongoing fiscal consolidation, Sri Lanka’s credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from State-owned enterprises. Moody’s expects general government debt to decline only gradually to around 78% of GDP in 2018, from 79.3% in 2016, significantly higher than the median of 53% for B-rated sovereigns. Progress on reducing external vulnerability has been slower. External and foreign currency debt account for about 43% of total Government debt, giving rise to significant exposure to external financing conditions. In particular, large volumes of external Government debt maturing in 2019-22 will test Government liquidity and external vulnerability. Further measures to build foreign exchange reserves will help establish buffers against external pressure, in particular ahead of 2019.

Signs that planned fiscal consolidation measures are less effective than Moody’s currently expects or that the authorities’ commitment towards such steps has diminished would weigh on Sri Lanka’s rating, particularly if foreign exchange reserves remain low while refinancing of market debt is challenging.

Meanwhile, evidence of effective implementation of reforms that leads to significant and lasting improvements in tax collection and more stable external financing conditions would support a return of the rating outlook to stable.


Share This Article


COMMENTS

Today's Columnists

Sustainable tourism – New profit for businesses

Tuesday, 26 September 2017

World Tourism Day has been celebrated since 1980 on 27 September, the day in which the Statutes of the World Tourism Organization (UNWTO) entered into force.


Do economic sanctions matter to Iran?

Tuesday, 26 September 2017

Economic sanctions are not a new phenomenon to Iran. It has been 38 years since the Iranian revolution (1979) took place. Since then, the United States, European Union and some other countries have been imposing


It is an uphill task for the Govt. to attain the envisaged targets

Monday, 25 September 2017

In Part 1 of the article series on the Government’s Vision 2025 published last week, it was pointed out that the present vision document was just the fourth of such visions pronounced by the Government during the last two year period.


Women for tourism

Monday, 25 September 2017

Tourism is one of the world’s largest and fastest growing industries. In many countries it acts as an engine for development through foreign exchange earnings and the creation of direct and indirect employment.


Columnists More