Fitch affirms Sri Lanka at ‘B’; Outlook Stable | Daily News

Fitch affirms Sri Lanka at ‘B’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook.

Sri Lanka’s ‘B’ rating balances high government debt and contingent liabilities, a challenging external financing profile and subdued economic growth against higher human development standards and per capita income levels compared with peer medians.

The policy environment has improved after the resolution of last year’s political standoff. The 2019 budget was passed and the IMF programme resumed and was extended by one year to June 2020.

The IMF staff announced recently an agreement on the sixth review of the extended fund facility (EFF). The currency appreciated by about 3% against the US dollar by end-1H19 after weakening by nearly 19% by end-2018. However, Sri Lanka is entering an election cycle, with presidential elections in November this year followed by parliamentary elections in 2020, and the risk of policy slippage and political tensions resurfacing closer to the elections remains high, in Fitch’s view.

Fitch forecasts a budget deficit of 5.4% of GDP in 2019, above the authorities’ target of 4.4%, as weak growth partly reflecting the drop in tourists has adversely affected revenue collection. “We expect the deficit to stabilise at about 5% of GDP in 2020 and 2021 under our baseline assumptions. Downside risks to our projections could arise from a shift towards a more expansionary fiscal policy.”

Fitch has revised its growth forecast for 2019 to 2.8% from 3.6% at the time of the previous review in December 2018 because of the negative impact of the April 2019 bombings on tourism, which accounts for about 5% of GDP. Growth slowed to 2.6% in 1H19 from 4.2% in 1H18, dragged down by a slowdown in services.

Tourist arrivals in August fell about 28% yoy after a decline of about 71% in May, according to the latest data from the central bank.

Sri Lanka’s near-term external and fiscal financing constraints have eased somewhat after the sumption of the IMF programme in February and the issuance of USD4.4 billion of sovereign bonds to date in 2019. In addition, the sovereign has also repaid USD1.5 billion in international sovereign bonds. Foreign-exchange reserves rose to USD8.5 billion after declining to USD6.9 billion by end-2018. “We project foreign-exchange reserve coverage to remain at around three months of current external payments through 2021.”

Nonetheless, Sri Lanka’s external debt obligations (principal and interest) remain substantial over 2020-2023, with nearly USD19 billion due, and its external liquidity ratio remains far weaker than peer medians. A prolonged period of policy uncertainty accompanied by an adverse shift in investor sentiment could exacerbate Sri Lanka’s external refinancing risks.

Monetary policy continues to focus on maintaining macroeconomic stability and inflation has remained subdued so far in 2019, partly a result of the slowdown in growth and lower food and commodity prices.

We expect Sri Lanka’s current account deficit to narrow slightly to 3.1% of GDP in 2019 from 3.2% in 2018, as the negative impact from lower tourism earnings has been somewhat offset by a drop in imports.

High government debt and large interest payments remain a key credit weakness.

Sri Lanka’s gross general government debt (GGGD) was about 83% of GDP at end-2018, far greater than the current ‘B’ median of 56.4%.

Fitch maintains a negative outlook on Sri Lanka’s banking sector as we anticipate continued pressure on banks’ financial profiles due to pressure from a challenging operating environment.

 


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