Fitch affirms Lanka’s ratings at ‘B+’, Outlook Stable

Fitch Ratings has revised the Outlook on Sri Lanka’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to Stable from Negative.

At the same time, the agency has affirmed the Long-term foreign and local currency IDRs and the Country Ceiling at ‘B+’, and the Short-term IDR at ‘B’.

“The revision to Sri Lanka’s Outlook reflects positive changes in sovereign credit fundamentals following the end of the 26-year civil war, the approval of a US$2.6bn IMF agreement and the return of private sector capital inflows,” Head of Asia Sovereigns at Fitch James McCormack said.

“Official foreign exchange reserves were US$4.3bn at end-September, which is a record high, and are expected to exceed US$5bn by year-end, providing a substantial lift to the sovereign’s external financial position,” McCormack said.

In Fitch’s view, there is a real opportunity for economic renewal as part of the post-war transformation of Sri Lanka.

The agency believes that, with the fighting having ended, it is much more likely that a durable political consensus can be reached on constitutional change and other measures to allow for the sharing of power among different ethnic groups and across different levels of government.

A more settled political backdrop should, in turn, allow policymakers to focus more on economic issues, including construction and development in areas directly affected by the war, some of which has already begun.

In fact, the economic ‘peace dividend’ should extend to the entire economy, as the labour force effectively expands, and costs such as transportation and insurance decline.

Concurrent foreign-currency inflows from international donors, investors and the Sri Lankan diaspora are expected to supplement domestic resources available for investment spending. Increased tourism receipts offer additional potential foreign-currency income, and tourist arrivals have increased sharply on a year-on-year basis in recent months.