SL-S’pore FTA credit positive for both sovereigns: Moody’s

The Free Trade Agreement (FTA) signed between Sri Lanka and Singapore last week is expected to enhance cross-border trade of goods and services and promote FDI to improve Sri Lanka’s credit quality making the deal a credit positive for both countries, rating agency Moody’s said yesterday. 

The FTA will have a larger effect on Sri Lanka’s credit quality because the potential increase in current account inflows and inward investments would help reduce its elevated external vulnerability.

The FTA liberalises bilateral trade in goods. Sri Lanka will eliminate tariffs on 80% of products over 15 years. Singapore’s Ministry of Trade and Industry estimates that the agreement will result in approximately SGD 10 million in annual tariff savings.

“Because Singapore does not impose import duties on 99% of tariff lines, the agreement’s trade benefits for Sri Lanka will materialise through the opening of access to the broader Association of Southeast Asian Nations (ASEAN) market and other large economies given Singapore’s existing preferential trade arrangements with Australia, Japan, Korea and other countries in Southeast Asia,” the rating agency said in a statement.

In 2017, Sri Lanka was Singapore’s 37th-largest trading partner, while Singapore was Sri Lanka’s eighth-largest trading partner; total bilateral trade amounted to about 0.5% of Singapore’s GDP and 2.5% of Sri Lanka’s GDP. The FTA is aimed at supporting growth in bilateral trade. 

“The extent to which the FTA reduces Sri Lanka’s external vulnerability will depend on its effectiveness at bolstering services and investment flows. Sri Lanka’s current account has a structural deficit because a large merchandise trade deficit more than offsets a surplus in services and remittance inflows. Moreover, FDI inflows only partially finance the current account shortfall, resulting in a persistent basic balance (FDI inflows plus current account balance) deficit,” Moody’s said.  

The FTA is likely to boost Sri Lanka’s services receipts, particularly in tourism. Using travel and passenger transport by air as a proxy, tourism accounts for about three-quarters of the services surplus. Although Singapore comprised less than 1% of Sri Lanka’s total tourist arrivals in 2017, the FTA may allow Sri Lanka to leverage Singapore’s transportation hub to attract more tourists. Additionally, there are provisions on the cross-border transfers of information by electronic means and data flows, which could aid Sri Lanka’s burgeoning IT services sector.

The agreement also will promote direct investment in Sri Lanka by Singaporean companies. According to the Sri Lankan Government, FDI from Singapore totalled $658 million (less than 1% of GDP) during 2006-17 in sectors such as food manufacturing and real estate. By easing regulation in the services sector, the FTA will broaden the scope of investment to other areas such as infrastructure, logistics, education and healthcare.

The agreement also protects against expropriation, improves transparency through safeguards against discriminatory treatment and provides for a dispute resolution mechanism, all of which create a better investment climate to attract FDI.

The Free Trade Agreement continues Sri Lanka’s move toward greater openness of trade and investment. In particular, as part of its International Monetary Fund Extended Fund Facility program structural reform objectives, the Government is reviewing its trade regime to boost trade and private-sector development, focusing on reducing costs and bolstering competitiveness through reform of para-tariffs and other nontariff barriers that have hampered exports. As part of this effort, Sri Lanka also has started negotiations on other free trade agreements, including with China.

The SLSFTA is Singapore’s 21st trade agreement with 32 trading partners, and reiterates Singapore’s commitment to free and open markets. Particularly within the region, the agreement promotes the growth of outward Singaporean investment, helps maintain its strong positive net international investment position (224% of 2016 GDP), and solidifies its strength as a hub for global trade, finance, and logistics.