Fitch affirms SL’s IDRs at ‘BB-’; Stable Outlook

Fitch Ratings affirmed Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-’. The Outlooks on the ratings are Stable. The agency has also affirmed the Country Ceiling at ‘BB-’ and the Short-Term Foreign-Currency IDR at ‘B’.

The affirmation of Sri Lanka’s sovereign ratings reflects the following factors:

Sri Lanka’s ratings balance the strength of the country’s resilient growth performance, healthy level of human development and strong payment record against the weaknesses of its fiscal and external balance sheets and moderate domestic savings relative to investment needs.

The Stable Outlooks acknowledge the stabilisation of the overall economy over the past year, following the introduction of a series of monetary, exchange rate and fiscal measures in early 2012, which helped to reverse the deterioration in the balance of payments that took place in 2011.

Although the current account deficit fell short of the authorities’ original target of 3.8% of GDP, it narrowed to 6.6% in 2012 from 7.8% in 2011. Fitch projects that the current account deficit should decline further to about 5.2% in 2013 and 4.5% in 2014 due to a combination of stronger global growth and lower oil imports.

Persistence with tighter monetary and fiscal policies should help improve Sri Lanka’s external liquidity position. Official foreign exchange reserves, excluding gold, rebounded to USD6.9bn (3.7 months of current external payments) at end-January 2013. This is up from a recent low of USD5.5bn at end-February 2012.

Sri Lanka’s external debt refinancing schedule, however, remains quite heavy as an average of USD1.9bn per annum in sovereign debt is projected to mature from 2013 to 2015 (versus USD1.3bn in 2012). This may not only limit Sri Lanka’s ability to rebuild foreign exchange reserves to a much higher level, but it also means that the country’s external finances will remain vulnerable to any spike in global risk aversion.

The economy has been resilient as real GDP grew 6.4% in 2012 versus 8.2% in 2011. Fitch projects real GDP growth to average 6.5%-7% in 2013 and 2014, compared with the government’s forecasts of 7.5% and 8% in 2013 and 2014 respectively. Fitch believes the government’s forecasted growth could once again lead to overheating risks. Consumer price inflation has fallen of late, rising 7.5% year-on-year in March, down from an average of 9.8% in January and February.

Following the successful completion of an IMF stand-by arrangement in July 2012, Sri Lanka has decided not to seek an extended fund facility. A new IMF programme would have provided some comfort that Sri Lanka would stick with the reform measures implemented in early 2012. However, Fitch does not view a successor programme as essential, provided that the authorities remain vigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments do not re-emerge.