Moody’s Investors Service yesterday affirmed the government of Sri Lanka’s foreign currency issuer and senior unsecured sovereign ratings at B1 and changed the outlook to negative from stable.
Two key drivers underpin the change in outlook to negative from stable. The first was the expectation of a further weakening in some of Sri Lanka’s fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure .The second was the possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than Fitch currently expect, which could further weaken fiscal and economic performance.
At the same time, Sri Lanka’s B1 rating is supported by the economy’s robust growth potential and higher income levels than similarly-rated sovereigns.
With the effective implementation of some of the fiscal policy measures and other structural reforms planned under the IMF programme, the government would be able to tap a significant potential revenue base.
“The first driver of the negative outlook on Sri Lanka’s B1 ratings is our expectation that the government’s debt burden will increase further, from high levels, which could intensify external vulnerabilities and refinancing risks.”
“If there was a further marked deterioration in fiscal metrics combined with heightened balance of payment pressures, Sri Lanka’s overall credit metrics would weaken compared to other B1-rated sovereigns,” Fitch said.
Moody’s expects a more moderate reduction in budget deficits than outlined in the projections published as part of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF).
This reflects the difficulties in rapidly raising revenues after years of decline in the efficiency of tax collection and administration. “We forecast that the budget deficit will narrow to slightly under 5% of GDP by 2020, from 7.4% in 2015 and compared with 3.5% projected by the IMF as part of the EFF.
“In addition, a number of state-owned enterprises are under financial stress, pointing to sizeable contingent liability risk for the government. Some of these risks have already crystallised with the government taking responsibility for SriLankan Airlines’ (unrated) liabilities, worth Rs. 461 billion.”
“These liabilities will inflate government debt, at least temporarily. With nominal GDP growth slower than in the last decade, persistent sizeable deficits will raise the government’s debt burden.”
“We expect government debt to rise to just under 80% of GDP and subsequently fall to around 75% by the end of the decade, above the IMF’s projections (68.2% in 2020) and debt levels of similarly rated sovereigns.”
www.dailynews.lk
Two key drivers underpin the change in outlook to negative from stable. The first was the expectation of a further weakening in some of Sri Lanka’s fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure .The second was the possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than Fitch currently expect, which could further weaken fiscal and economic performance.
At the same time, Sri Lanka’s B1 rating is supported by the economy’s robust growth potential and higher income levels than similarly-rated sovereigns.
With the effective implementation of some of the fiscal policy measures and other structural reforms planned under the IMF programme, the government would be able to tap a significant potential revenue base.
“The first driver of the negative outlook on Sri Lanka’s B1 ratings is our expectation that the government’s debt burden will increase further, from high levels, which could intensify external vulnerabilities and refinancing risks.”
“If there was a further marked deterioration in fiscal metrics combined with heightened balance of payment pressures, Sri Lanka’s overall credit metrics would weaken compared to other B1-rated sovereigns,” Fitch said.
Moody’s expects a more moderate reduction in budget deficits than outlined in the projections published as part of the International Monetary Fund’s (IMF) Extended Fund Facility (EFF).
This reflects the difficulties in rapidly raising revenues after years of decline in the efficiency of tax collection and administration. “We forecast that the budget deficit will narrow to slightly under 5% of GDP by 2020, from 7.4% in 2015 and compared with 3.5% projected by the IMF as part of the EFF.
“In addition, a number of state-owned enterprises are under financial stress, pointing to sizeable contingent liability risk for the government. Some of these risks have already crystallised with the government taking responsibility for SriLankan Airlines’ (unrated) liabilities, worth Rs. 461 billion.”
“These liabilities will inflate government debt, at least temporarily. With nominal GDP growth slower than in the last decade, persistent sizeable deficits will raise the government’s debt burden.”
“We expect government debt to rise to just under 80% of GDP and subsequently fall to around 75% by the end of the decade, above the IMF’s projections (68.2% in 2020) and debt levels of similarly rated sovereigns.”
www.dailynews.lk
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