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Friday, 22 May 2009

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Government Gazette

S & P rating poor

The Sri Lankan authorities are deeply shocked to note the incredulous decision of S & P to downgrade Sri Lanka's stable outlook to negative as from today. The authorities also consider the contents of the Rating Agency's report as outrageous, arbitrary and biased, especially in the context of current favourable developments that are taking place in Sri Lanka. In that context, the Sri Lankan authorities totally reject the rating report.

Over the past few days, the country has received higher than normal foreign exchange inflows pursuant to the victory against terrorists. At the same time, this year's private remittances have comfortably exceeded the trade deficit. In fact, the country recorded the highest-ever inflow of remittances during the month of March 2009. Moreover, inflows into the stock market have been improving significantly during the lat few days which has resulted in the rapid increase of all stock market indices.

Business confidence levels have also been improving rapidly over the recent past, with the Sri Lankan diaspora and other international investors beginning to invest in Sri Lankan Government Treasury Bills and bonds, in significant amounts.

As a result, the exchange rate which stood at approximately Rs. 120 per US Dollar a few days ago has appreciated towards Rs. 115 per US Dollar. In that scenario, in order to support competitiveness, the Central Bank has been absorbing significant amount of foreign currency from the forex market, which has resulted in the Central Bank, building up its reserves rapidly.

In addition, following the monetary policy relaxation measures taken by the Central Bank and the inflows of foreign currency, domestic interest rates have reduced, and the private sector credit is now beginning to increase. In this favourable scenario, international investors too have re-affirmed their confidence in the Sri Lankan economy, and as a result, the spread on the Sri Lankan Sovereign Bond has reduced sharply by well over 500 basis points over the past few days.

It is incredible that S & P could have overlooked all these positive trends and signals. It is also astonishing that S & P has taken the highly damaging stand of projecting the potential depreciation of the Sri Lanka rupee in its report. Such subjective and arbitrary comments are clearly unprofessional. Such comments could only be due to the rating committee obviously misreading the real trends in the economy, or due to these viewpoints being expressed under pressure for reasons best known to them.

It is also very strange that the S & P has taken the decision to downgrade the outlook, knowing fully well that the Managing Director of the IMF has already indicated that a resolution to the issue of the SBA facility requested by Sri Lanka is being worked out soon.

The Sri Lankan authorities have, even in the past, pointed out several instances where the rating reports of S & P have been clearly biased. It is also disturbing that S & P has, on many occasions, shown a marked reluctance to give due consideration to the many factors that are positive in the Sri Lankan economy. This stance naturally casts serious doubts about their ability to provide an impartial and professional judgement about Sri Lanka's credit. In that light, the Sri Lankan authorities will now be compelled to review its relationship with this rating agency. At the same time, the Sri Lankan authorities will also take necessary steps to directly communicate the many positive and emerging features of the Sri Lankan credit profile, to the many investors and stakeholders who have an interest in the Sri Lankan credit, so that the negative impression created by the arbitrary report of S & P is addressed appropriately.



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