Top marks for Sri Lanka from Fitch Rating
View(s):Sri Lanka received top marks from a global rating agency on Thursday when Fitch Ratings affirmed Sri Lanka’s Long-Term Foreign- and Local Currency Issuer Default Ratings (IDR) at ‘B+’ and revised the ‘Outlook to Stable from Negative’.
Fitch, in a report released to the media on Thursday, said that the country’s fiscal performance was better in 2016 than 2015, there was an improvement in the policy coherence and credibility, amidst stable growth trends.
It said Sri Lanka’s ‘B+’ rating balances its weak public finances and strained external liquidity position compared with peers against the steady progress made on the country’s ongoing International Monetary Fund (IMF) supported programme, which commenced in June 2016.
The IMF programme has eased near-term pressure on the balance of payments. The rating is supported by Sri Lanka’s favourable growth performance as well as its basic human development indicators and governance standards, which are more favourable as compared with some peers.
Fitch estimates that Sri Lanka’s 2016 fiscal performance was better than in 2015, following strong revenue growth that was supported by a value-added tax (VAT) hike. This, along with lower government spending, should narrow the deficit in 2016 to around – 5.6 per cent of GDP, from -7.4 per cent in 2015.
“Fitch believes the 2016 VAT hike to 15 per cent from 11 per cent and other revenue reforms announced in the 2017 budget are likely to support further fiscal deficit reductions in 2017, with the agency revising down its 2017 deficit forecast to -4.7 per cent of GDP against its earlier estimate of close to -7 per cent. The authorities’ 2017 deficit estimate of – 4.6 per cent is below the agency’s estimate, as the authorities have higher growth assumptions. However, Fitch expects authorities to lower spending if there is a large revenue shortfall to keep the fiscal deficit under control,” the report added.
Fitch said Sri Lanka’s 3-year extended fund facility with the IMF has improved policy coherence and credibility and has eased some near-term balance of payments pressure.
“Fitch expects the country’s external funding profile to benefit from support by multilateral agencies, although its external liquidity position remains weak compared with peers. The IMF-supported programme sets ambitious fiscal targets and the authorities have made steady progress, meeting their quantitative performance targets for the first review in November 2016. Progress on some structural benchmarks has also been made, including passage of the 2017 budget in line with programme targets,” the report said.
While stating that Sri Lanka’s growth performance remains favourable, Fitch estimates the country’s five-year (2012-2016) average real GDP growth at 5.3 per cent, which is stronger than some of its ‘B’ category peers.
On relatively high government debt, Fitch estimates overall gross general government debt to have reached close to 77 per cent of GDP by end-2016, although it should gradually decline over 2017- 2018 due to improving government revenues.
It said foreign-currency debt, which is close to 40 per cent of GDP, weakens Sri Lanka’s fiscal finances, as it increases the risk of higher debt in local currency terms if the rupee depreciates sharply.