Moody and Fitch, the word’s biggest rating agencies, have expressed concern over the recently-passed expropriation bill saying it casts a shadow over the investment climate in the country.
“…an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka,” Moody said in comments made in its weekly credit report.
“Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka,” Moody’s said.
Fitch said the new law that enables the government to take control of businesses could hinder investment in the country, although much will depend on the scope of the law. “While the Sri Lankan government has said that this is a one-off measure, and the list implies that the Act is limited in scope, there is a risk that it will set a precedent for further expropriation and will be applied to a broader range of businesses and assets,” Fitch said in a separate statement.
Moody said it is unclear whether the assets will be managed by the state or resold to other investors, and how performance will be revived. “The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current government to exert strong and direct influence over the economy. Nonetheless, Sri Lanka’s Supreme Court ruled early last week that the bill was not inconsistent with Sri Lanka’s constitution.”
Maintaining investor confidence is the key to Sri Lanka’s ability to continue to collect the peace dividend.
Fitch noted that the new laws would be a disincentive for both local and foreign investors. A barrier to investment would be negative for growth, which has been strong in Sri Lanka since the end of the country’s civil war in 2009. Real GDP grew 8% in 2010 and is likely to grow at a similar rate in 2011, it said.
“Coupled with recent IMF concerns about how Sri Lanka is managing its exchange rate, the new law highlights the need to watch policy developments closely as they could hurt the economic outlook, which has improved significantly over the past 18 months,” the statement noted.
Fitch said it currently rate Sri Lanka BB with a stable outlook. A sustained period of strong economic growth, particularly if accompanied by an improvement in the investment climate and private sector capital spending, would be supportive for the rating. Continued focus on boosting fiscal revenues while reforming the shape of spending would also support the ratings, it added.
“The ability to attract non-debt capital inflows, specifically FDI, would help reduce Sri Lanka’s reliance on external debt and could improve the overall competitiveness of the economy. Sri Lanka’s strong economic growth has though come despite weak foreign direct investment, which totalled just US$478 million, or 1% of GDP, last year,” the Fitch statement said. |
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