CB Governor optimistic that SL could narrow budget deficit
Central Bank Governor Nivard Cabraal, though 2013 budget targets have already gone awry, has expressed optimism that Sri Lanka will be able to narrow the budget deficit to around 5.2 per cent of GDP while maintaining single digit inflation.
In the backdrop of interest rates coming down further, the Government would witness a significant reduction in interest costs which would help contain the budget deficit to 5.2 per cent of GDP, he revealed at the Fitch Ratings Lanka Ltd’s inaugural Sovereign & Banking Roundtable in Colombo this week.
He said Sri Lanka is very eager to get an investment grade rating (at least BBB-) by 2016 adding that rating agencies did not consider individual country differences sufficiently.
Mr. Cabraal said all the fundamentals of the country’s economy have seen significant improvements over the past few years and the only thing that has not improved was Sri Lanka’s credit ratings.
He added that Sri Lanka is to reach 65 per cent of debt to GDP levels in 2016.
But he did not elaborate as to how the government is going to bridge the huge budget deficit amidst an increase in expenditure and revenue decline.
However he said, “the government is maintaining its fiscal consolidation programme aiming at a favourable macroeconomic impact”.
The economy is expected to grow at 7.5 per cent this year. Inflation, at single digit levels for the past 54 months, is expected to be subdued and interest rates are expected to come down further.
He disclosed that ‘all the country’s economic fundamentals’ have seen considerable improvements over the past few years and the only thing that has not improved was Sri Lanka’s credit ratings.
Governor Cabraal said Sri Lanka had curtailed foreign capital from coming into rupee bonds when times were good, had placed a cap of 12.5 per cent of total debt and also chosen investors who understood the country on a longer term basis.
Sri Lanka has already seen some pressure with foreign investors pulling out and others not renewing medium term bonds and moving to shorter term debt in recent days.
He said the Central Bank would be conducting a strategic planning session in the coming months where the risk of entering into a middle-income trap would be taken into consideration seriously.
Maninda Wickramasinghe, CEO and Head of Fitch Ratings Lanka Ltd said the enthusiasm in the bond market is a step towards the right direction for Sri Lanka to become a financial hub for South Asia.
“We see more financial institutions getting geared to finance their growth, corporates expanding their capital base and activities, as well as investing in technology to add value to their operations,” he added.
Sri Lanka has a ‘BB-’ speculative rating, three levels below investment grade with a stable outlook.Fitch has classified the country’s banking sector as a high risk sector which would remain until 2014, according to the ratings agency’s Senior Director Financial Institutions and Head of Bank Group South Asia Ambreesh Srivastava.
He said capitalization of banks needed to improve as well.
In a media release Fitch said the recent increase in foreign bond sales out of Sri Lanka could be the start of a long-term trend for stronger entities attempting to overcome weak domestic liquidity. The government has also encouraged institutions to borrow offshore to bolster foreign-currency inflows and offered tax breaks for listed corporate debentures in the 2013 budget.
Fitch has assigned international ratings to seven Sri Lankan companies and has more than 60 clients including almost all the banks in Sri Lanka and over half of the financial institutions, as well as the leading conglomerates, it said.
Since its inception in Sri Lanka in 1999, Fitch has rated over Rs. 600 billion (approximately US$4.6 billion) of debt issues for domestic corporates, as well as US$1.6 billion in international corporate debt.
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