Central Bank disputes Fitch Rating

The Central Bank has disputed the reasons adduced by Fitch Ratings in downgrading the ratings as being pessimistic.

Fitch has revised the outlook on the foreign and local currency issuer default ratings to Stable from Negative reflecting the improvements in investment climate in Sri Lanka.

Fitch has also acknowledged the fiscal consolidation efforts of the Government including revenue enhancing measures, containment of expenditure on subsidies, improvement in debt ratios, and the tightening of monetary policy by the Central Bank.

In addition, Fitch has recognised that food and oil price shocks have contributed to sharp acceleration in consumer price inflation in Sri Lanka.

The country’s impeccable debt service record has also been highlighted together with the improvement of the business environment in comparison to its regional and rating peers, and the moderate external debt service burden.

Notwithstanding these improvements, Fitch has downgraded Sri Lanka’s ratings, which is not consistent with improvements in several macroeconomic fundamentals which have been also acknowledged by Fitch. It is stated that Fitch has a concern on the repayment of foreign currency debt.

This statement is not valid since, out of US dollars 1.5 billion foreign currency debt repayment in 2008, a total of around US dollars 600 million is to domestic banks.

Hence, the roll-over risk is practically nil. Moreover, even if these domestic foreign currency loans were repaid, it will not change the total external reserves of the country as these foreign currency loans are assets of domestic commercial banks, particularly the two state banks, the Central Bank said yesterday.

In addition, for 2008, worker remittances are expected to increase to US$ 2.8 billion, foreign inflows to Government to US$ 2 billion and the FDI to US$ 700 million.

In fact, during the first three months of 2008, net international reserves of Sri Lanka have increased by over US$ 420 million from their level as at end 2007.

The Sri Lankan authorities also do not agree with Fitch’s opinion on the security situation in Sri Lanka to the effect that the risk of disruptive terrorist attacks, despite the military gain, cannot be wholly discounted.

As stated by Fitch in its report, the Government has expanded its control in the entire East and now is moving towards the North and has already regained certain areas in the North, such as in Mannar, the Bank said.

The downward revision of ratings is based on Fitch’s pessimistic views on the security situation, inflation and foreign currency borrowing.

In view of the above facts, Sri Lankan authorities believe a downgrade in ratings is not in line with the recent improvements in the country’s macroeconomic fundamentals and its future outlook.