Fitch Ratings, an international ratings agency, on Friday revised the outlook on Sri Lanka's long-term foreign and local currency Issuer Default Ratings (IDRs) to negative from stable and listed several concerns including the dwindling foreign reserves – but the Central Bank has rejected this finding.
However, a top independent economist said the 'negative' rating could affect the cost of foreign borrowings.
"If the government attempts to borrow in the international financial market, the rate of interest would be much higher than earlier. We would have to pay some basis points above LIBOR the London Interbank Offered Rate)," economist Nimal Sanderatne said.
Dr. Sandaratne, a former Deputy Governor of the Central Bank, and former Chairman of the Bank of Ceylon, said this would also mean foreign investors would look at the ratings and could be deterred by it.
The CB, however, said the revision was based on the "rating
agency's pessimistic view on the various measures currently being implemented by the Sri Lankan authorities to raise external financing and also its pessimistic views on external current account deficit and future economic growth prospects."
Fitch, in a statement, said Sri Lankan official reserves at the end of December last year were US$ 1.75 billion, down sharply from their peak of US$ 3.56 billion in July last year.
At the same time, the agency has affirmed the long-term foreign and local currency IDRs and the Country Ceiling at 'B+', and the short-term IDR at 'B'.
Asia Sovereign Rating head James McCormack was quoted as saying the revision in Sri Lanka's outlook reflected heightened concern regarding the sovereign's external financial position in light of the marked decline in official foreign reserves.
The CB, in response, said, "While it is true that reserves have declined, it should be noted that it is a reflection of the consequences of global financial crises which resulted in a global liquidity crises leading to the drying up of credit lines. By now it is well known that the Central Bank had to provide foreign exchange to meet the demand arising from withdrawal of foreign investment in government securities and payment of large petroleum bills and thereby prevent undue volatility in the foreign exchange market."
Dr. Sanderatne, who now teaches at the University of Peradeniya, said he believed that the international financial situation and the security conditions in the country were such that foreign investors were not likely to invest much anyway.
Even in the best of times, he said, foreign investment had not been that great. "The actual figures are quite small. What has saved us is the private worker remittances which are financing a very high proportion of the trade deficit."
He said the government had plans to replenish the reserves through further borrowing but it was important that such borrowings were on terms that were not too onerous. “It is vital that the problem faced by the country now is not transformed into a burden for the future. The foreign debt of the country has reached a high proportion already and every effort must be made to ensure that the debt servicing costs are not excessively onerous,” he said.
Fitch said it estimated that Sri Lanka's current account deficit widened to US$ 3.6 billion last year (8.8% of GDP) from US$ 1.5 billion in 2007, with most of the deterioration in the trade deficit which grew to an estimated US$ 4.4 billion from US$2.4 billion. However, the decline in the trade deficit has not prevented a steady drawdown in official reserves, as improvements in the trade balance have been more than offset by external debt repayments and other net capital outflows.
This year, Fitch forecasts the trade deficit will fall to US$ 3.5 billion and the current account will decline to US$ 2.1 billion, equivalent to 4.9% of forecast GDP. At the end of last year, Sri Lanka's reserves covered just 1.3 months of current external payments (including all debit items in the current account of the balance of payments), one of the lowest coverage ratios of any emerging market.
The CB said among measures taken to boost reserves, already one central bank has extended a Swap facility and negotiations with two others are at an advanced stage and expected to be finalized soon. At the same time, Sri Lankans living overseas were positively responding to opportunities offered to invest in government securities and enhanced return on Non-Resident foreign currency accounts, it said. As a result, the CB expects substantial investment flows from these measures in the immediate future.
The CB said remittances this year were expected to remain steady in view of the nature of the Sri Lankan migrant workforce and the steps taken by authorities to direct them through official channels.
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