Less volatile growth, political uncertainty persists
View(s):In a May 13 rating review released this week,Fitch Ratings says Sri Lanka’s ‘BB-’/Stable rating reflects high and less volatile real GDP growth compared with peers, and a favourable level of basic human development against persistent political uncertainty, weak public finances and a frail external liquidity position.
Noting that the key developments showed persistent political uncertainty, weak public finance and an external liquidity position, it said on the positive side, there had been a significant improvement in external finances “underpinned by a sustained cut in the current account balance and higher foreign direct investment, and improvement in foreign reserves”.
A credible medium-term fiscal consolidation strategy was also leading to a reversal of the negative trend in government revenue and GDP, it said.
On the negative side, Fitch observed a further increase in external vulnerability because of sharp decline in foreign reserves and deterioration in policy coherence and credibility leading to a widening of macroeconomic imbalances and a loss of investor confidence.
Reflecting on the developments, the report said that after a smooth transition of power during the January 2015 Presidential elections, there is persistent uncertainty to the actual date of parliamentary elections. It said the poll has been postponed though initially planned for June.
It said general government revenues continue to decline, and this trend is likely to continue. “The interim budget announced in January 2015 did little to address the underlying weaknesses in the fiscal profile as most of the revenue measures announced was one-off in nature,” the Fitch said.
“Sri Lanka’s foreign-reserve coverage of its current external payments remains narrow, and is vulnerable to shifts in investor sentiment,” the report noted adding that this was especially true because foreign holdings of Sri Lankan government securities are high while domestic political uncertainty currently prevails.
“Lower oil prices, a steady inflow of remittances and tourism receipts are expected to support the current account. But wage increases announced in the interim budget and the policy rate cut in April could translate into higher imports and is a risk to the current account that bears monitoring,” the report added.