Sri Lanka is rated BB- with a stable outlook.
"The persistence of global economic and financial uncertainty underscores the importance of buffers for sovereign creditworthiness in terms of the strength of sovereigns’ own balance sheets and scope for policy flexibility to absorb and offset shocks," Fitch said in a report titled ‘2013 Outlook: Emerging Asia Sovereigns’.
"Sri Lanka couples limited fiscal flexibility, thanks to its high debt, with an already strongly negative real policy rate, suggesting limited scope for a policy response if a shock occurs," the ratings agency said.
"Ratings will balance the benefit of proven market access against the risks of rapid growth in foreign-currency denominated public debt. At the regional level, foreign currency denominated debt is projected to decline as a ratio of current external receipts. However it is projected to remain above 100% for Sri Lanka and to remain above the end-2011 level for Mongolia. This factor is likely to weigh on these sovereigns’ ratings.
"In terms of indebtedness, Indonesia is in the strongest position as it has a debt/GDP ratio below the median for its peer range and the ratio is projected to fall on current forecasts, giving scope for a fiscal policy response if growth slowed sharply. Debt ratios are projected to fall slightly in India and Sri Lanka, but those sovereigns’ high public indebtedness gives limited scope for further fiscal easing if shocks materialise.
"Emerging Asia is projected to post the strongest GDP growth of any global region until 2014, despite slowdowns in the two giants, China and India. Growth forecasts were trimmed after the June Sovereign Review and Outlook for export-driven economies including Korea and Taiwan, mainly reflecting weaker expected global growth. Export-led slowdowns in many regional countries in H212 demonstrate that final demand from the high-income economies remains important for emerging Asia.
"Importing Loose Monetary Conditions: Most emerging Asian sovereigns responded to global uncertainty with tight fiscal policies and loose monetary policies. The average regional budget deficit was about 2% of GDP in 2012, while real interest rates are near zero, and regional currencies have not strengthened markedly in nominal effective terms. Easy money policies contribute to concern about macro-prudential risk in China, Indonesia, Mongolia and Sri Lanka (all in the highest-risk ‘3’ category of Fitch’s macro-prudential risk framework).
"Emerging Asia’s economic outlook has weakened since the September Global Economic Outlook. Growth forecasts were revised down for the more trade-driven economies of Korea and Taiwan amid a weaker global outlook. Consumption in Korea and Taiwan is also facing headwinds from high household indebtedness.
"Fitch has revised down forecasts for Indonesia and Sri Lanka in expectation of tighter policy settings to avoid overheating. The agency shaved China’s growth forecast for 2013 by 0.2pp on signs that stimulus measures announced in summer 2012 are feeding through to investment more slowly and on a smaller scale than expected in September," Fitch said.