Notable increase in fiscal challenges in Sri Lanka - Moody’s | Daily News

Notable increase in fiscal challenges in Sri Lanka - Moody’s

Fiscal challenges have increased most notably in Malaysia and Sri Lanka. In Malaysia, the abolishment of the goods and services tax in favour of a narrower sales and services tax will shrink the government’s tax base.

In general, the government’s focus on supporting growth and incomes of poorer households is a factor behind a slower fiscal consolidation path than previously projected, Moody’s Investor Service said in a report titled “Sovereigns – Asia Pacific - 2019 outlook stable as domestic strengths counter rising external, policy uncertainties” yesterday.

“We expect that the administration will still pursue fiscal consolidation from wider deficit levels. But should the government prioritize growth and provisions to low-income households further, Malaysia’s fiscal strength would weaken. Moody’s downgraded Sri Lanka’s rating in November 2018 after a political crisis.

“In Sri Lanka, we expect continued political tension and disruption to fiscal and economic policymaking to slow budgetary consolidation efforts and keep the government debt burden higher for longer.”

“Upcoming elections could also weigh on fiscal consolidation in India and hinder the Indonesian government’s plan to widen the tax base,” the reprot siad.

The impact of policy choices on fiscal outcomes would be more limited in Australia, where we expect budget deficits to continue to narrow despite a fractious political environment that has persisted for some time, and in the Philippines, where the first – and most revenue-accretive – package of the government’s Comprehensive Tax Reform Program took effect at the beginning of 2018.”

It further said, “foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening the ability of these governments to refinance debt and fund deficits affordably. Foreign exchange reserves have declined owing to persistent current account deficits, which have widened over the past two years.”

“Our external vulnerability indicator (EVI)5 reading for both countries exceeds 160% for 2019, indicating that total public and private external debt due over the next year is larger than foreign exchange reserves.

The reserves coverage of imports has also fallen, particularly in Pakistan, where reserves are now worth less than two months of goods and services imports.

“Tighter global funding conditions resulting in higher credit risk premia and/or domestic interest rates would quickly transmit to government finances in both countries – where debt affordability is already weak– owing to large gross borrowing requirements. For Sri Lanka, further political tension could also spark capital outflows and raise the country’s risk premia, exacerbating tight financing conditions.”

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