UNP unlikely to ‘wilfully’ default on loan repayment

A top international rating agency said a future UNP administration is unlikely to wilfully default on any loan negotiated by the current administration.

Referring to the saga of the US$500 bond issue that the UNP says is illegal, Fitch Ratings Sri Lanka said: “The government has stated that the bond has been properly authorised and Fitch currently judges that any future UNP administration would not wilfully default.”

Fitch was commenting on the issue in the course of a press release issued this week where it assigned a ‘BB- (BB minus) rating for the government's forthcoming debut sovereign bond.

“This rating is in line with Sri Lanka's 'BB-' Long-term foreign currency Issuer Default rating (IDR) which is on Negative Outlook,” Fitch said.

It said the United National Party (UNP) has publicly challenged the legality and the economic rationale for the bond issue and has threatened to disavow the debt and withhold payments on the bond, should it come to power at some time in the future.
However Fitch said Sri Lanka has an unblemished debt service record - a rare trait among sub-investment grade sovereigns - while public debt declined slightly in 2006.

“Nonetheless, public debt remains high by the standards of rating peers at 93% of GDP and interest payments absorb almost 30% of government revenues, notwithstanding the concessional nature of much external public debt,” it said adding that it believes that concerted fiscal consolidation is required to reduce the vulnerability of the economy and the public finances to adverse shocks and to smooth the transition to less concessional sources of fiscal and external funding. “Should the security situation adversely affect economic growth and delay planned reductions in the budget deficit from last year's level of 7.3% of GDP (including grants), the government's target of reducing public debt to 76% of GDP by 2010 could be at risk,” the statement said.

The ratings are underpinned by high levels of human capital development, good governance, reasonably strong institutions and a liberal economic climate.

Paul Rawkins, Senior Director in Fitch's Sovereign rating team in London, said Sri Lanka's economy last year expanded at 7.4%, its fastest rate for more than two decades, underpinned by rising domestic and foreign investment and record inflows of remittances (equivalent to around 8% of GDP). More recently, however, growth has slowed to around 6% and inflation has risen sharply to 17% year-on-year (from 10% in H106), driving up yields on government paper to similar levels.

"Steering inflation back down to single digits will be essential for sustaining strong economic growth and containing the government's debt service costs," he said.