S&P B+long-term and B short-term sovereign credit ratings on Lanka
The Standard & Poor's Ratings Services affirmed its 'B+' long-term
and 'B' short-term sovereign credit ratings on Sri Lanka. The outlook
remains stable.
They also affirmed the recovery rating at '4'. The transfer and
convertibility (T&C) assessment is unchanged at 'B+'.
"We affirmed the ratings to reflect our view of Sri Lanka's weak
external liquidity, a moderately high and increasing net external
liability position.
Additional rating constraints include the country's fundamental
fiscal weaknesses, and the attendant high government debt and interest
burdens. Political institutions that lack transparency and independence
are a further rating weakness,S&P's said.
"Support for the ratings comes from Sri Lanka's robust growth
prospects and the Government's moderate progress in addressing a number
of its structural weaknesses through fiscal measures and success in
limiting inflation to single digits. 'Sri Lanka's external liquidity
remains weak," said Standard & Poor's credit analyst Takahira Ogawa.
"This is despite the Government and the Central Bank having shifted
their monetary and exchange rate policies to control the pace of credit
expansion and reduce the country's trade and current account deficits
over the past year. We estimate its gross international reserves will
stay at three months coverage of current account payments in 2013."
"Although the Sri Lankan Government has started to implement some of
its planned fiscal reforms, progress has been slow so far. Further
reforms could gradually improve the country's competitiveness as well as
reduce fiscal burdens," Ogawa said.
A narrow tax base, the debt burden from a long civil conflict and the
reconstruction, extensive subsidies, and a bloated public sector have
contributed to a fiscal deficit of 8% of GDP on average over the past
decade.
The increase in Government debt often exceeded the deficit because of
currency depreciation.
Although Sri Lanka's inflation edged up to 9.8% in January 2013,
S&P's believes it will ease slowly this year, as the rupee stabilises.
Inflation has been in single digits since 2009. The rupee depreciation,
price increases for electricity and fuel, drought, and floods pushed
prices higher in 2012.
"In our view, the country's growth prospects are favorable. We expect
investment to climb toward 30% of GDP on continued reconstruction and
other public investments," Ogawa said. The stable outlook reflects the
view that the country has strong medium-term prospects, with per capita
GDP growth of more than 6%, and an improving fiscal profile. S&P's
balance these strengths against its vulnerable external liquidity and
high fiscal and external debt.
The outlook also reflects the view that the country will keep the
pace of credit expansion in check, which will help to contain the
country's external imbalances.
"We may lower the rating if the stabilising external liquidity
situation falters, or if Sri Lanka's growth and revenue prospects
diminish markedly. Conversely, we may raise the rating if economic
reforms reduce fiscal and external vulnerabilities and broaden the
still-narrow economic profile," S&P's added. |