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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Economy hanging on peace dividend

Economy hanging on peace dividend

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1Economy hanging on peace dividend Empty Economy hanging on peace dividend Wed Jul 18, 2012 2:26 am

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
* International ratings agencies rate Sri Lanka’s upcoming US$ 1bn bond issue

Red Alert: Weak external liquidity; moderately high and increasing external debt; fundamental fiscal
weaknesses; high public debt and interest burden; political institutions lacking transparency and independence.


With Sri Lanka planning to raise US$ 1 billion through an international sovereign bond issue sometime soon, three leading international sovereign ratings agencies Fitch, Moody’s and Standard and Poor’s yesterday (17) released their ratings for the issue, citing the peace dividend, strong economic growth and painful macroeconomic adjustments as positives for the economy amidst some serious concerns.

Authorities almost threw away an opportunity for creating a better economy for all after a balance of payments crisis was ignored for more than six months, which meant the inevitable adjustments have led to a more-than-necessary burden in the rising cost of living, which could escalate further if the government does not come good on its promises to keep the fiscal deficit under control, as steps taken to avert the balance of payments crisis are pressurising fiscal operations.

S&P…

According to Standard & Poor’s Ratings Services (S&P), which assigned its ‘B+’ foreign currency issue rating to the proposed U.S. dollar-denominated global senior unsecured benchmark-sized bond issuance which mature in 2022, "The rating incorporates Sri Lanka’s favorable growth prospects, which we believe are partly due to the ‘peace dividend’—or the positive effects of the end of the civil war in 2009. We expect investments in the economy to edge upward to 30% of GDP, boosting per capita growth to more than 6% per year in the next few years".

S&P goes on to say that the administration has started to implement a part of its planned fiscal reforms, helped by increased political stability. "Further reforms could gradually improve the country’s competitiveness as well as fiscal and debt profiles," it said.

"However, the rating is constrained by: (1) Sri Lanka’s weak external liquidity; (2) moderately high and increasing external debt; (3) fundamental fiscal weaknesses and the attendant high public debt and interest burden; and (4) political institutions that, in some cases, lack transparency and independence.

"Sri Lanka’s external liquidity has weakened in 2011 because of the larger current account deficits, equivalent of 7% of GDP. In response, the government and the central bank have recently begun to adjust their monetary and foreign exchange rate policies to curtail the pace of credit expansion and import growth.

"The stable outlook on the sovereign credit rating reflects our view that Sri Lanka’s strong medium-term growth prospects of more than 6% of GDP per capita and recent measures to improve the fiscal profile are balanced against vulnerable external liquidity and high fiscal and external debt. We also expect the recently announced monetary and foreign exchange policy to keep the country’s external position from deteriorating further.

"We may raise the sovereign rating on evidence of Sri Lanka’s progress in addressing the external weaknesses and domestic problems. Fiscal or structural economic reforms that reduce the vulnerabilities from high debt and interest burdens and the still-narrow economic profile would indicate such improvement.

"Conversely, we may lower the rating if the country’s external liquidity deteriorates substantially, or if Sri Lanka’s growth and revenue prospects fall below our current expectations," S&P said.

Moody’s…

Moody’s has assigned a provisional foreign currency rating of (P)B1 with a positive outlook to the government of Sri Lanka’s proposed U.S. dollar-denominated global bond.

"Sri Lanka’s B1 sovereign rating reflects Moody’s Investors Service’ methodological assessment of the country’s low economic and government financial strengths, moderate institutional strength, and a moderate susceptibility to event risks," the ratings agency said.

"The outlook for the sovereign rating was changed to positive in 2011, reflecting an increasingly evident peace dividend reflected in greater macroeconomic stability, as well as a policy orientation of fiscal reform and economic growth that continues to be guided by an IMF program. In addition, the monetary authorities have established a regulatory and supervisory framework supportive of financial stability.

"Robust growth momentum carried into 2012 with real GDP growing by 7.9% year-on-year in the first quarter. However, pressures on the balance of payments that had built up since mid-2011 prompted macroeconomic policy tightening starting in February 2012 to temper widening trade balances and declining foreign exchange reserves.

"The external payments position has stabilized, although greater exchange rate flexibility may be reflected in higher inflation in the near-term. The growth outlook has also moderated somewhat, but trend fiscal consolidation remains intact with both the budget deficit and stock of debt continuing to fall as a percentage of GDP.

"The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs. However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.

"Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage. As such, Moody’s assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework," Moody’s said.

Fitch…

Meanwhile Fitch Ratings assigned the bond issue an expected ‘BB-(exp)’ rating. "The final rating is contingent on the receipt of final documentation conforming to information already received. The rating is in line with the Sri Lankan sovereign’s Long-Term Foreign Currency Issuer Default Rating (IDR) of ‘BB-’. Sri Lanka’s Long-Term Local Currency IDR is also ‘BB-’. The IDR Outlooks are Stable," Fitch said.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=57042

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