Fitch joins chorus, says nationalisation law could hinder investment

Fitch Ratings yesterday warned that Sri Lanka’s new law that enables the Government to take control of businesses could hinder investment in the country, although much will depend on the scope of the law.

Earlier this month, the Sri Lankan Parliament passed the Revival of Underperforming Enterprises and Underutilised Assets Act, identifying 37 business or assets that can be brought under Government control.

While the Sri Lankan Government has said that this is a one-off measure, and the list implies that the act is limited in scope, Fitch warned that “there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets”.

Fitch joins...

“This would be a disincentive for both local and foreign investors,” Fitch said, noting a barrier to investment would be negative for growth, which has been strong in Sri Lanka since the end of the country’s civil war in 2009.

Recalling that real GDP grew 8% in 2010 Fitch said economy is likely to grow at a similar rate in 2011.

“Coupled with recent IMF concerns about how Sri Lanka is managing its exchange rate, the new law highlights the need to watch policy developments closely as they could hurt the economic outlook, which has improved significantly over the past 18 months,” Fitch said.

“We currently rate Sri Lanka BB- with a stable outlook. A sustained period of strong economic growth, particularly if accompanied by an improvement in the investment climate and private sector capital spending, would be supportive for the rating. Continued focus on boosting fiscal revenues while reforming the shape of spending would also support the ratings,” Fitch said.

It pointed out that the ability to attract non-debt capital inflows, specifically FDI, would help reduce Sri Lanka’s reliance on external debt and could improve the overall competitiveness of the economy. Sri Lanka’s strong economic growth has though come despite weak foreign direct investment, which totalled just US$ 478 m, or 1% of GDP, last year.

Fitch’s warning comes a day after Moody’s on Monday in its Weekly Credit Outlook stated: “Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka. The Government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.”

Whilst noting that the Supreme Court has ruled the bill wasn’t inconsistent with the Constitution, Moody’s said the stated purpose for seizing the assets is that they are either underutilised, idle, have had no ongoing business operations for many years or that their use contravened the public interest. Two of the seized land assets were held by companies listed on the stock exchange.

“It is unclear, however, whether the assets will be managed by the State or resold to other investors and how performance will be revived. The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current Government to exert strong and direct influence over the economy,” the rating agency pointed out.

Moody’s also said that maintaining investor confidence was key to Sri Lanka’s ability to continue to collect the peace dividend.

“The authorities have embarked on a broad-based effort to review and reform regulations hindering investment to attract more private sector participation in the economy. But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka,” the agency added.