Rising debt, weakening fiscal management sees Moody’s downgrade SL rating to ‘negative’ from ‘stable’

Rising debt, less than expected fiscal reforms seen lowering Sri Lanka’s economic performance has led to Moody’s Investors Service (Moody’s) to change the country outlook to ‘negative’ from stable.
In a media statement issued from Singapore on Monday, the ratings agency said it was affirming the Sri Lankan government’s foreign currency issuer and senior unsecured sovereign ratings at B1. 

It said two key drivers underpinned the change in outlook: 
1)    Expectation of a further weakening in some of Sri Lanka's fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure, and 
2)    The possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than ‘we’ currently expect, which could further weaken fiscal and economic performance.
However it pointed out that at the same time, Sri Lanka's B1 rating is supported by the economy's robust growth potential and higher income levels than similarly-rated sovereigns. With the effective implementation of some of the fiscal policy measures and other structural reforms planned under the IMF programme, the government would be able to tap a significant potential revenue base.
The gloomy outlook came just as the government was torn in its ranks by opposing views over the future of under-fire Central Bank Governor Arjuna Mahendran. While Prime Minister Ranil Wickremesinghe is pushing for his re-appointment when the former’s term ends on June 30, those not in favour includes President Maithripala Sirisena who has the final say in the appointment.
Plagued by accusations of insider trading in bonds and other allegedly corrupt activity, Mr. Mahendran insists he is innocent while a parliamentary probe is underway over the bond scam and due to submit their report in the next few weeks. The crisis has been exacerbated by concerns, expressed privately though, by international multilateral agencies of their disappointment over the ‘affairs’ at the Finance Ministry by Minister Ravi Karunanayake and Treasury Secretary R.H.S. Samaratunga and the Central Bank under Mahendran’s watch. These agencies generally don’t express official viewpoints pertaining to the performance of public officials unless in extraneous circumstances.
The Moody’s report said that the first driver of the negative outlook on Sri Lanka's B1 ratings is “our expectation that the government's debt burden will increase further, from high levels, which could intensify external vulnerabilities and refinancing risks.”
If there was a further marked deterioration in fiscal metrics combined with heightened balance of payment pressures, Sri Lanka's overall credit metrics would weaken compared to other B1-rated sovereigns.
“Moody's expects a more moderate reduction in budget deficits than outlined in the projections published as part of the International Monetary Fund's (IMF) Extended Fund Facility (EFF). This reflects the difficulties in rapidly raising revenues after years of decline in the efficiency of tax collection and administration. We forecast that the budget deficit will narrow to slightly under 5 per cent of GDP by 2020, from 7.4 per cent in 2015 and compared with 3.5 per cent projected by the IMF as part of the EFF,” it said.
In addition, a number of state-owned enterprises are under financial stress, pointing to sizeable contingent liability risk for the government. Some of these risks have already crystallised with the government taking responsibility for SriLankan Airlines' (unrated) liabilities, worth Rs. 461 billion or around 4 per cent of GDP. These liabilities will inflate government debt, at least temporarily. “We assume that the government will retain responsibility for some of these liabilities.” - ENDS -