“Our assessment of government financial strength is “low” on account of the large debt burden, heavy debt service requirements and lingering external vulnerabilities. However, these risks are offset by post-conflict improvements in domestic competitiveness and growing foreign investor interest,” a recent report by Moody’s on country’s credit situation noted.
It also said that both these factors should support Sri Lanka’s balance of payments position and the fiscal reforms that have already started will lower future budget deficits.
As per Central Bank data, Sri Lankan government’s total debt stood at Rs.5707.8 billion at the end of March, 2012, out of which, Rs.2649 billion was foreign debt. However, despite the steep rise in debts, the debt to GDP (Gross Domestic Product) has been declining since 2010.
Incidentally, the Central Bank of Sri Lanka last week announced its plans to go for another international sovereign bond issue up to Rs.1 billion for the redemption of the country’s first sovereign bond issue which matures in October,2012.
Moody’s in its report also identified strategic economic development initiatives, relatively sound banking system and support from official creditors as credit strengths of the country.
However, last week, Standard & Poor’s in a report, assigned Sri Lanka’s banking sector to ‘high risk’ category, citing credit and regulatory conflicts, which the Central Bank refuted stressing that the country’s banking system is well regulated and capitalized.
Meanwhile, external payment position vulnerability, large government debt burden and shallow domestic markets have been recognized by Moody’s in its report as the credit challenges Sri Lanka is faced with.
Moody’s changed its B1 rating on Sri Lanka on July 18, 2011 from ‘stable’ to ‘positive’, given the positive effects of robust growth and debt dynamics.