Moody’s rating decision unfounded: Central Bank

 Central Bank of Sri Lanka

• CB contends downgrade unjustified as no slippage in macroeconomic policies
• Insists making efforts to maintain reserves at about $ 8 b and raise adequate funds for debt repayments 
• Gives details of swaps, loan from China Development Bank,and H’tota funds to meet payments 
• Domestic financing improved through better debt management strategies   

The Central Bank yesterday said the credit rating downgrade by Moody’s does not properly reflect the country’s macroeconomic fundamentals and is therefore unwarranted.

Moody’s downgraded the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings from B1 (Negative) to B2 (Stable) on Tuesday. Issuing a statement in response, the Central Bank said Sri Lanka’s macroeconomic position has neither deteriorated nor has there been any policy slippage since Moody’s last rating decision in July, in spite of the recent developments in the country’s political sphere. 

In fact, based on satisfactory program performance, the Sri Lankan authorities and the International Monetary Fund (IMF) reached staff-level agreement following the fifth review of the Extended Fund Facility (EFF) program on 26 October, and the agreement was to be announced on 29 October, the statement said. The program discussions are currently on hold, pending clarity on the political situation.

Sri Lanka’s current level of gross official reserves (GOR) amounting to $ 7.2 billion is sufficient for the country to meet its external debt obligations in the period ahead. In addition, as a precautionary measure, the CBSL has initiated negotiations with central banks of friendly nations with regard to obtaining foreign currency swap facilities of sizable amounts. These measures will further strengthen the country’s foreign reserve adequacy, and would enable timely servicing of external obligations while intervening cautiously in the foreign exchange market to prevent a disorderly adjustment of the exchange rate. 

In addition, the fiscal and macro prudential measures that are already in place are expected to result in an improvement in the external trade balance as well, thus reducing pressure on external reserves and the exchange rate.

“Arrangements have already been made to ensure Sri Lanka’s track record of meeting debt obligations on time is sustained. In order to meet the Government’s external liabilities of International Sovereign Bond (ISB) maturities of $ 1 billion in January 2019 and $ 500 million in April 2019, the authorities have already built a buffer fund from proceeds of the divestment of Hambantota Port and the syndicated loan of China Development Bank (CDB). The space provided under the Active Liability Management initiative not exceeding a limit of Rs. 310 billion also provides for building required buffers and spaces to meet future debt service payments,” the statement added. 

In addition, the issuance of Sri Lanka Development Bonds (SLDBs) of around $ 750 million to $ 1 billion during the remainder of the year and in early 2019 is now at an advanced stage of completion. These investments would be sourced through enhanced credit lines for state banks from the Middle East and East Asia, together with remittance and tourism related inflows. In addition, the $ 500 million enhancement in February 2019 to the syndicated loan obtained from CDB is also on track. This means that by February 2019, more than $ 2 billion will be mobilised. This would be more than enough to cover all the ISB payments due in 2019. In addition, the buffer can be further built up through $ 600 million expected as disbursements from bilateral and multilateral agencies during next year.

Meanwhile, domestic financing conditions have shown considerable improvement through spaces created and debt management strategies introduced recently. This has reduced the rollover requirement of Treasury bonds and SLDBs in 2019, 2020, and in the medium term. The Treasury bond maturities, which amounted to over Rs. 600 billion in 2018, are lower in 2019 and 2020, amounting to around Rs. 450 billion and Rs. 290 billion, respectively. 

Similarly, SLDB maturities, which amounted to around $ 2.3 billion in 2018, have also been reduced to around $ 0.62 billion and $ 0.82 billion in 2019 and 2020, respectively. Further, the new acquisition of government securities by the banking sector has increased by only 1.5% in 2018 as against the trend increase of around 5% in recent years. These developments, along with resource availability among institutional investors, highlight the substantial space that exists to meet financing requirements from the domestic market. 

Continued fiscal consolidation, particularly with the positive primary balance and the Active Liability Management initiatives, are expected to further strengthen the Government’s fiscal operations in 2019 and in the medium term, the Central Bank said. “Given these parameters, the Central Bank is of the view that the recent rating action by Moody’s is unwarranted. Such an action only on the premise of heightened political uncertainty, with no evidence of slippages in macroeconomic policies, cannot be justified.”