Tuesday 29 April 2014

Sri Lanka 'BB-' rating confirmed, foreign debt, deficits high: Fitch

Apr 28, 2014 (LBO) - Fitch Ratings has confirmed a 'BB-' rating on Sri Lanka with a stable outlook on strong economic growth but said state debt was over twice that of similar rated countries and foreign debt three times as much.

Sri Lanka's rating is three levels below the lowest investment grade rating of 'BBB-'. The outlook was stable.

"Official data do not point to overheating of the economy, as inflation (4.2 percent in March) and credit growth (4.4 percent in February) are low," Fitch Ratings said.

"However, average inflation over the past five years has been high (6.2 percent) and volatile compared with peers (5.0 percent median for the 'BB' peer group) and the potential for a build-up of future imbalances exists."

Fitch said authorities had a pro-growth bias with monetary policy being eased despite high official growth.

The public finances are weak relative to peers despite fiscal consolidation.

Both the budget deficit (5.9 percent of GDP in 2013) and government debt burden (78.3 percent of GDP in 2013) are more than double the 'BB' category medians of 2.7 percent and 35.9 percent of GDP, respectively.

"The 2014 budget signals commitment to medium-term debt reduction to maintain a gradual fiscal consolidation path, although the process is slow and to a large extent built on revenue projections that may turn out too optimistic," Fitch said.

The current account deficit has fallen from 6.7 percent of GDP in 2012 to 3.9 percent in 2013.

A current account deficit is generally caused when inflows that generate a surplus in the capital accounts is spent by domestic players. In Sri Lanka the government is a net borrower abroad. Private foreign borrowings are also picking up.

Foreign investments when spent, also expands the current account through capital imports.

But the current account deficit can also surge beyond the capital account surplus when money is printed by a central bank to sterilize foreign exchange sales during a so-called a balance of payments crisis and forex reserves are run down as happened in 2011 and 2012.

Fitch said in 2014 the external current account deficit is expected to narrow to 3.2 percent of gross domestic product.

Only relatively small part of the current account deficit was financed by foreign direct investments Fitch said.

Hence, net external debt (45.1 percent of GDP in 2013) was almost triple the 'BB' peer category median of 15.9 percent of GDP.

Band debts were 5.6 percent of loans in 2013 which Fitch said was "relatively high" and was expected to rise to 6 percent in 2014.

"However, the banking sector is not very large relative to the economy, with the credit to GDP ratio at only around 40% at end-2013," Fitch said.

"Rapid credit growth in the past elevated Sri Lanka into the highest '3' category of Fitch's Macro-Prudential Indicator."

No comments:

Post a Comment