Lanka’s outlook downward revision by Fitch Ratings unwarranted
Sri Lankan authorities are issuing this statement in response to the
revision of the outlook on the Sri Lanka’s Foreign and Local Currency
Issuer Default Ratings to Negative from Stable, while reaffirming the
country’s both long-term and short term default rating a media release
from the Central Bank said.
It is clear that the revision is based on the rating agency’s
pessimistic view on the various measures currently being implemented by
the Sri Lankan authorities to raise external financing, and also its
pessimistic views on external current account deficit and future
economic growth prospects.
According to Fitch, the revision reflects the concerns regarding the
sovereign’s external financial position in light of the decline in
reserves. While it is true that reserves have declined, it should be
noted that it is a reflection of the consequences of global financial
crises which resulted in a global liquidity crises leading to the drying
up credit lines.
By now it is well-known that the Central Bank had to provide foreign
exchange to meet the demand arising from withdrawal of foreign
investment in government securities and payment of large petroleum bills
and thereby prevent undue volatility in the foreign exchange market. In
fact, reserves had been built up by the Central Bank to face this type
of contingent events. This has not been unique to Sri Lanka and similar
declines in reserves has been experienced by many countries.
As admitted by Fitch, the Sri Lankan authorities have taken several
measures to boost reserves, which are yielding desired results. Already
one central bank has extended a Swap facility and negotiations with two
others are at an advanced stage, and expected to be finalized soon. At
the same time, Sri Lankans living overseas are positively responding to
opportunities offered to invest in government securities and enhanced
return on Non-resident foreign currency accounts.
As a result, we expect substantial investment flows from these
measures in the immediate future. The war on terror is also about to
end, and an increased volume of remittances are expected for
reconstruction and rehabilitation in newly liberated areas. Going
forward, all these measures are expected to bring in substantial foreign
inflows to the country and help build Sri Lanka’s official reserves to a
very comfortable level before long.
The pessimistic view of Fitch is reflected in its assessment of the
current account deficit of the BOP at 4.9% of GDP in 2009 which is
considerably higher than the assessment of Sri Lankan authorities (2.7%)
as well as that of the Economic Intelligence Unit which is 2.1%.
A significant decline in trade deficit is expected due to sharp
decline in commodity prices, in particular petroleum. Therefore, a
current account deficit of relatively small magnitude as estimated which
is expected to be quite manageable with expected financial inflows,
especially, the steady flow of remittances.
In fact, the remittances during 2009 are expected to remain steady in
view of the nature of the Sri Lankan migrant workforce and the steps
taken by authorities to direct them through official channels.
It is true that the recessionary conditions in advanced countries
could have some impact on growth in 2009, but it is unlikely to bring
growth down to three per cent projected by Fitch. Sri Lanka has fully
liberated the Eastern province and the entire North is to be liberated
soon.
Accordingly, the work relating to rehabilitation and reconstruction
will commence soon and a vast area will be available for productive
activity and hence, the growth momentum will not be as pessimistic as
projected by Fitch, the release added. |