Sri Lanka’s growth offsets political debility warns Fitch

Thursday, 25 June 2015 01:10 - - {{hitsCtrl.values.hits}}

Sri Lanka’s ‘BB-’/Stable rating reflects high and less volatile real GDP growth compared with peers, Fitch Ratings said in its Asia Pacific Sovereign Overview for the second quarter of 2015.

The rating reflects a favourable level of basic human development against persistent political uncertainty, weak public finances and a frail external liquidity position.

Sri Lanka’s persistent political uncertainty, weak public finances and weak external liquidity position weighed in its rating.

The global rating agency noted that Sri Lanka witnessed a smooth transition of power during the January 2015 presidential elections. However, parliamentary elections are due next, the timing of which still remains uncertain. Parliamentary elections have been postponed further despite being initially planned for June 2015.

Sri Lanka’s public finances remain weak, according to Fitch. General government revenues continue to decline, and in Fitch’s view, this trend is likely to continue. The interim budget announced in January 2015 did little to address the underlying weaknesses in the fiscal profile as most of the revenue measures announced were one-off in nature.

Sri Lanka’s external liquidity position is weak as foreign reserve coverage of its current external payments remains narrow, and is vulnerable to shifts in investor sentiment. That is especially true because foreign holdings of Sri Lankan government securities are high and domestic political uncertainty currently prevails.

Lower oil prices, a steady inflow of remittances and tourism receipts are expected to support the current account. But wage increases announced in the interim budget and the policy rate cut in April could translate into higher imports and are a risk to the current account that bears monitoring.

A significant improvement in external finances underpinned by a sustained cut in the current account balance and higher foreign direct investment, and improvement in foreign reserves are positive rating factors.

Credible medium-term fiscal consolidation strategy that leads to a reversal of the negative trend in government revenue and the GDP is favourable to the rating.

A further increase in external vulnerability because of a sharp decline in foreign reserves, affects the rating negatively while a deterioration in policy coherence and credibility leading to a widening of macroeconomic imbalances and a loss of investor confidence also contribute to the negative rating.