S&P’s affirms Lanka ‘B+/B’ ratings; Outlook Stable

Friday, 2 August 2013 03:46 -     - {{hitsCtrl.values.hits}}

  • Says Sri Lanka’s robust growth prospects support the ratings but strengths are balanced against vulnerable external liquidity and high fiscal and external debt.
Standard & Poor’s Ratings Services said yesterday that it has affirmed its ‘B+’ long-term and ‘B’ short-term sovereign credit ratings on the Democratic Socialist Republic of Sri Lanka. The outlook on the long-term rating is stable. The transfer and convertibility assessment remains ‘B+’. S&P’s also affirmed ‘B+’ issue rating on Sri Lanka’s outstanding notes. “We affirmed the ratings to reflect our view that Sri Lanka has weak external liquidity, moderately high and increasing external debt, and a weighty government debt and interest burden. In addition, some of the country’s political institutions lack extensive checks and balances,” said Standard & Poor’s credit analyst Takahira Ogawa. Sri Lanka’s robust growth prospects support the ratings. Growth drivers include government measures to reconstruct the northern districts, improve the finances of public enterprises, and limit inflation to single digits S&P’s added. However S&P’s said Sri Lanka’s external liquidity remains exposed to international liquidity conditions. Through 2015, Standard & Poor’s projects that Sri Lanka’s gross external financing needs will exceed 120% of current account receipts (CAR) plus usable reserves. It also forecasts that the country’s external debt – net of official reserves and financial sector external assets – will be more than 100% of CAR. Standard & Poor’s expects Sri Lanka’s gross international reserves to remain at three months’ coverage of current account payments in December 2013, a similar level to that in 2012. That’s despite decisive action from the Government and the Central Bank in early 2012 to improve the country’s external position, through allowing the Sri Lankan rupee to depreciate and reining in credit expansion. Fundamental fiscal weaknesses remain although the Government’s fiscal metrics have improved over the past three years. Standard & Poor’s project the annual growth in general Government debt will be 7.4% of GDP on average for 2013-2016. It expects net general government debt to decline to 71% of GDP at year-end 2015 from 77% of GDP in 2012 because of robust nominal GDP growth and some fiscal consolidation. Standard & Poor’s projects that the attendant interest burden will comprise more than a third of Government revenue through 2015. It also expects inflation to decline gradually this year. The country’s favourable growth prospects are highlighted in its projection that investment will edge up toward 30% of GDP on continued reconstruction and strong public sector investments. This trend should boost per capita real GDP growth to 6% each year in the next few years from about 5.5% currently. “The stable outlook reflects our view that the growth prospects for Sri Lanka’s per capita real GDP will be more than 5.5% in the next few years and the government’s fiscal profile could improve,” said Ogawa. “These strengths are balanced against the country’s vulnerable external liquidity and high fiscal and external debt. We also expect Sri Lanka to keep in check the pace of credit expansion and its net external liability position.” “We may raise the rating if Sri Lanka’s external and fiscal indicators improve more than we currently forecast, given well-designed policy and robust implementation. Conversely, we may lower the rating if the country’s external liquidity deteriorates or if Sri Lanka’s growth and revenue prospects fall below our current expectations,” S&Ps said.