The US debt crisis compounded by the country’s latest credit downgrade by rating agency Standard & Poor's (S&P) is unlikely to affect Sri Lanka’s economy, particularly the Central Bank (CB) which has a sizable portion of its $8 billion foreign reserves invested in US Treasury Bills (t-bills), CB sources and analysts said.
“The CB invests in a mix of securities in the US and elsewhere (in other countries). The US is generally considered a safe haven and though interest rates are lower, our investments are made based on security (of investment),” one CB source, who declined to be named, said, adding however that with the latest developments, “questions will be raised as to whether the US will continue to be a safe haven.” He declined to give the percentage of funds invested in US t-bills.
On Friday, S&P lowered the US credit rating to AA+ from AAA, for the first time since 1917 in the world’s biggest economy, news agencies said, adding that this came less than a week after the US Congress agreed to spending cuts that would reduce the debt by more than $2 trillion.
The promised cuts were not enough to satisfy S&P, analysts in Colombo said, adding that “it was not surprising for the US credit rating to be lowered. In fact it should have been done some-time back instead of waiting till the US economy was on the brink and required a Congress rescue package.”
Credit ratings evaluate the credit worthiness of a company or country and the lower the rating, the greater the risk of
default, analysts say. Lowering the US credit rating, for the first time means the risk of default by the country is greater than before.
A top Sri Lankan garment exporter to the US said the credit downgrade agency would not affect exports.
“People buy and have to buy clothes and in that sense there would be little impact. However if sentiment falls – like it did in 2009 during the US financial crisis - there could be drop in spending patterns on consumer goods,” he said.
Analysts said that spending cuts would deter growth which in turn would impact on consumer spending.
With the debt crisis growing and the credit rating being a negative signal to those investing in the US, the US would have to raise interest rates to attract funds. Currently treasury bill-interest rates are around 1% compared to as much as 3-4% in other markets.
Analysts say the US economy is in bad shape with the deficit at nearly 10% and unemployment at 9.8%, much higher than Sri Lanka.