SL’s sovereign rating upgraded
Peace dividend, macro-economic financial stability
the factors :
Ravi LADDUWAHETTY
Globally renowned Ratings Agency - Moody, through its Singapore arm-
Moody’s Investors Service Singapore (Pvt) Ltd yesterday upgraded Sri
Lanka’s foreign currency sovereign rating from B1 stable to B1 positive.
The key drivers for the upgrade have been an increasingly evident
peace dividend reflected in greater macro-economic and financial
stability; a policy orientation of fiscal reform and economic growth,
supported by a successful IMF programme; an improving external payments
position; and a reduction in political event risk following the end of
the civil war in 2009.
Moody’s Investors Service Singapore Pte. Ltd’s Sovereign Risk Group
Senior Vice President - Regional Credit Officer Thomas J. Byrne, in a
Singapore datelined Global Ratings Report on Sri Lanka issued yesterday
titled Rationale for Sri Lanka’s outlook change to positive said: “After
the long-running civil war ended two years ago, Sri Lanka has started to
reap a peace dividend that has accrued to the economy and the security
environment.
The economy is expected to grow sustainably at around eight to nine
percent over the medium-term as confidence is further bolstered and
investment picks up.”
The report which has been jointly compiled with Moody’s Sovereign
Risk Group assistant vice president - analyst Christian de Guzman also
said: Greater macro-economic stability is seen in a downward trend in
inflation from very high levels evident during the civil war. The
re-integration of the northeastern part of the country formerly
controlled by the separatist Tamil movement is helping to raise food
supply.
“Although the government budget has not directly gained from the end
of the conflict as defence mobilization remains high, a benefit is being
realized by the sharp tightening in yields on government bonds.
Nevertheless, the budget deficit is gradually declining in line with
annual targets set out in the government’s IMF programme.
“External vulnerabilities are also expected to ease in the near term.
Relatively moderate current account deficits should continue to be
easily financed, in part by rising inflows of foreign direct investment,
as reflected in small balance of payment surpluses that have led to a
steady rise in foreign exchange reserves. Merchandise export performance
and tourism receipts have been especially buoyant early this year. In
addition, Sri Lanka is rapidly building up its port cargo capacity,
exploiting its strategic location astride the main shipping lane between
the Middle East, South Asia, and Southeast Asia.”
Commenting on the ratings constraints, the report said “The main
challenge facing the government is the reduction of its large debt
overhang and the consequently large debt servicing costs. Among
non-investment grade credits, only Lebanon, Jamaica, Ireland, and
Portugal surpass Sri Lanka in terms of general government debt as a
share of GDP. On a net present value basis, however, the debt burden is
lower owing to a considerable share of concessionary debt. Nonetheless,
Sri Lanka is well-placed to grow out of its debt given its robust
outlook for growth.
“Re-integration of the Tamil minority in the war-torn northeast
region is progressing, namely in the provision of humanitarian
assistance and supporting development projects. However, the process of
political reconciliation is at an early stage and will need to advance
further to ease persisting concerns about political risk. As such,
Moody’s assessment of event risk remains somewhat elevated, but at a
moderate level in our global bond methodology framework.”
Under future ratings triggers, the report said: “Continued deficit
reduction as targeted by the government coupled with the containment of
inflation amidst sustained high rates of growth would be credit positive
developments over the 12-18 month rating horizon. Such developments
would lead to a steady reduction in the government’s debt burden and
would enlarge the government’s fiscal space to cope with future
contingencies or shocks.
In other words, a longer track record in effective policy management
by the post-civil war government would be viewed as credit positive.”
|