Sri Lanka’s local currency bonds rated ‘BB-’

Singapore —Standard & Poor's Ratings Services this week assigned its 'BB-' long-term local currency debt rating to Sri Lanka’s Treasury Bonds totalling Rs. 872.9 billion. The rating applies to outstanding bonds up to December 15, 2006, and includes 53 instruments issued in the period June 2002 to November 2006 with maturities ranging from five to twenty years. Proceeds of these bond issues are used for general budget funding purposes.

Standard & Poor's sovereign credit ratings on the Democratic Socialist Republic of Sri Lanka (Sri Lanka) are foreign currency 'B+/B' and local currency 'BB-/B'. The outlook on both the long-term foreign currency and local currency ratings is negative, a press release from the agency said.

“The ratings on Sri Lanka reflect the high level of government indebtedness and weak revenue mobilization, together with security concerns posed by the unresolved conflict with Tamil separatists,” said Standard & Poor's credit analyst Agost Benard. “These factors are balanced against the economy’s demonstrated resilience and favorable medium-term growth prospects, as well as the benign terms of its external debt, which impose minimal stress on external liquidity.”

Sri Lanka’s limited fiscal flexibility due to weak public finances and a narrow tax base is a significant constraint on its credit rating. Although recent tax rises caused a notable increase in the tax-to-GDP ratio to an estimated 15.5% in 2006 from 13.1% in 2003, the country’s tax base remains fundamentally deficient.

The high level of public indebtedness is an additional constraint on the ratings. Lack of political will and the divergent policies of successive governments hampered consolidation efforts in the past. General government debt stood at an estimated 90% of GDP in 2006, and the interest burden on this debt at close to 30% of general government revenues further restricts fiscal flexibility. The debt-to-revenues ratio at an estimated 470% is more than double that of the median for similarly rated countries, and highlights Sri Lanka’s high level of indebtedness and the relatively low fiscal resource base to service it.

“The outlook on the rating on Sri Lanka could revert to stable with more robust initiatives to further fiscal consolidation, or if tangible progress were achieved in a final peace settlement with the Tamil separatists,” said Benard. “A resumption of full-scale war and fiscal slippage, however, would exert downward pressure on the rating.”