International rating agencies Fitch Ratings and Moody's Investors Service have both upgraded Sri Lanka’s ratings providing a much needed boost for the cash-strapped country.
The Central Bank (CB) said Fitch upgraded Sri Lanka’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to ‘BB-‘ from ‘B+’ and also the Country Ceiling to ‘BB-‘ from ‘B+’ and affirmed the Short-Term Foreign-Currency IDR at ‘B’.
Moody's Investors Service upgraded the outlook of Sri Lanka’s B1 foreign currency sovereign rating from ‘Stable’ to ‘Positive’.
The CB statement said Moody’s rating upgrade decision was driven by the following key factors:
- An increasingly evident peace dividend reflected in greater macroeconomic and financial stability.
- A policy orientation of fiscal reform and economic growth, supported by a successful IMF program.
- An improving external payments position.
- A reduction in political event risk following the end of the civil war in 2009.
It said Fitch’s decision to upgrade the ratings has been based on the stabilization and recovery of the economy and increased efforts by the Government to bring down the budget deficit. “Moody’s has commented that augmented investor confidence and increase in investments along with the falling inflation, the economy is expected to expand sustainably by 8-9% in the medium term,” the CB said welcoming the upgrade and saying it is confident that the measures taken towards the macroeconomic stability and improvement of the economy over the past several years would yield further favourable results in coming years.
A separate statement by Fitch quoted Art Woo, Director in Fitch's Asia Sovereign Ratings group, as saying, "The upgrade reflects the stabilization and recovery of the economy under the country's IMF programme and increased efforts to address the chronic budget deficit position."
It said real GDP grew an impressive 8% in 2010, up from a 3.5% rise in 2009 as Sri Lanka's post-war economic transformation, particularly the integration of the war-torn northern and eastern provinces, continued to gain traction. In tandem, the current account position held up well, with a deficit of 2.9% of GDP in 2010, compared with the peak shortfall of 9.5% in 2008.
Moreover, the positive economic momentum extended into 2011: GDP rose 7.9% yoy in the first quarter due in part to strong demand for exports, particularly garments and textiles.
As a consequence, Fitch forecasts real GDP to grow 7.5%-8% in 2011 and 2012. Consumer price inflation (CPI), which has historically proven to be both high and volatile, has been relatively well behaved, rising 7.5% yoy in H111, compared with a 6.2% rise in 2010.
The benign outcome is especially encouraging given that the domestic agriculture sector suffered a sharp downturn in output earlier in the year and global food and energy prices remain elevated. Fitch said it forecasts CPI to be 7.5% in 2011 and 6.8% in 2012.
On the fiscal deficit, which is one of the sovereign's key rating weaknesses, particularly when compared with 'BB' rating category peers, Fitch said if the authorities are likely to achieve budget deficit targets of 6.8% of GDP for 2011 and 5.2% for 2012.
However it pointed out that FDIs following the end of the civil war has been surprisingly weak, totalling just US$ 478 million (or 1% of GDP) in 2010.
“Fitch would view the authorities' ability to continue consolidating the budget deficit, by both enhancing the tax revenue base and rationalising expenditures, and in tandem lowering the level of public debt as supportive for Sri Lanka's ratings. A sustained period of strong economic growth, particularly if accompanied by an improvement in the investment climate and private sector capital spending, would also be supportive for the ratings.
In contrast, continued double-digit inflation or deterioration in political stability would put downward pressure on Sri Lanka's ratings,” the statement said. |
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