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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka faces slower growth and external pressure: Moody's

Sri Lanka faces slower growth and external pressure: Moody's

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Mar 13, 2013 (LBO) - Sri Lanka is facing higher external pressure due to lack on a program with the International Monetary Fund and also slower growth, Moody's Investors Service, a rating agency said.

"Although the government will likely continue to make gradual progress in reducing its deficit, the debt burden will remain high," Moody's said.

"The absence of a new funding program is credit negative from the perspectives of external payments and growth."

IMF ended a 2.6 billion US dollar loan program last year.

Sri Lanka dropped plans for another IMF program last month after the lender declined to disburse money to the Treasury rather than the Central Bank, while also saying there was timing issues related to any agreed reforms.

Moody's has given Sri Lanka a 'B1' speculative rating with a Positive outlook.

Moody's has just released a report 'Sri Lanka -- The Post-IMF Backdrop: Downward Growth Pressures and Elevated External Pressures", that looks at macroeconomic stability, external payments position and controlling budget deficit which affect the credit outlook.

Moody's said there has been progress since a civil war ended in 2009.

"However, given the challenging macroeconomic backdrop, the report's conclusion is that a follow-up funding program would have augmented international reserves directly through borrowed IMF resources," the rating agency said.

"Through enhanced policy certainty under an IMF funding program, investor confidence would likely have been bolstered.

"And in doing so, it would have provided additional support to the balance of payments and economic growth prospects."

Moody's said the government will continue to gradually reduce its deficit but supplier cash arrears, weak revenues and contingent liabilities in state enterprises were concerns.

"Moreover, high inflation and rapid credit growth are risks to macroeconomic stability," the agency said.

Other analysts have said that moves to adjust power prices as well as more frequent changes to petroleum products are likely to reign in credit growth and reduce the risk of balance of payments pressure.

So far this year private credit growth has slowed allowing the Central Bank to build up reserves by selling down its Treasury bills stock and killing credit.

State borrowing from banks remain high, though it expected to ease when power prices are raised after April.

Meanwhile Moody's said while reserves have grown back to 6.9 billion US dollars as Sri Lanka recovered from a 2011/2012 balance of payments crisis, they are still below 8.1 billion US dollars in July 2011 when the country's outlook was changed to positive.

Moody's said its External Vulnerability Indicator (EVI) measured external reserves at 124 percent of short term debt, it was down from 132 percent, but higher than 100 percent.

IMF, which tracks net reserves has said that under its measurements reserves were below 100 percent of short term debt.

Moody's said a new IMF program would have helped build reserves by 1 to 1.5 billion US dollars.

Moody's said it was better to push for foreign direct investment rather than foreign bank credit.
http://lbo.lk/fullstory.php?nid=1173348328

2Sri Lanka faces slower growth and external pressure: Moody's Empty SCB downgrades Lanka’s growth forecast Wed Mar 13, 2013 10:08 pm

sriranga

sriranga
Co-Admin
* Key risk from not getting new IMF loan: FX reserves may again dwindle due to higher import spending, warns bank

* More fiscal consolidation required
* Inflation elevated; ease later on base effect, improvement in food supply
* Limited room for monetary policy easing; 50bps cut in Q3
* Weakening global demand to affect exports but BOP to post surplus
* Rupee to end year at Rs. 126.50 against US dollar
* Fall out of IMF programme may dwindle reserves


Standard Chartered Bank (SCB) yesterday (13) downgraded Sri Lanka’s economic growth forecast for 2013 from 7.2 percent to 6.2 percent due to a slower-than-expected recovery.

"We see three reasons for a slower-than-expected recovery as the economy adjusts to bold central bank policy measures aimed at addressing growing imbalances: (1) more fiscal consolidation is required; (2) inflation is elevated, limiting room for near-term policy easing; and (3) the recovery in Sri Lanka’s main trading partners, the EU and US, remains slow. That said, Sri Lanka looks well positioned to achieve slightly faster growth in 2013 than 2012?s 6.5% given that the policy bias is shifting towards supporting growth," Standard Chartered Bank said in a report titled ‘Standard Chartered Asia Focus: Transforming, rebalancing, outperforming’ released Wednesday (13).

The Ministry of Finance is confident that GDP growth in the 7.0-7.5% range is achievable given 15% projected growth in money supply, but the bank said it was less optimistic.

"Inflation is high, public debt remains elevated at c.80% of GDP, and tax revenue collection is less than 11.5% of GDP (among the lowest in Asia) as a consequence of falling imports and tax administration issues. The government relied heavily on capital spending cuts and delays in cash payments to achieve its fiscal deficit target of 6.2% of GDP in 2012; this is a concern, as lower capital spending may stifle growth. The 2013 deficit target of 5.8% of GDP will be challenging to meet unless significant revenue-generating reforms are implemented," Standard Chartered Bank said, echoing sentiments expressed by the International Monetary Fund (IMF) earlier this year. The IMF had said that Sri Lanka risked undermining macroeconomic stability.

"In light of these concerns, we lower our 2013 GDP growth forecast to 6.7% from 7.2%; this also reflects the fact that 2012 was likely 6.5%, below our most recent 6.8% forecast," Standard Chartered Bank said.

"CPI inflation has been at or above 9% for the past six months, partly on account of adverse weather conditions and related food-price shocks. We expect inflation to moderate from Q2-2013 onwards, largely due to base effects and improved food supply. This should counter potential fuel price rises expected in the coming months.

"The slowing of credit and domestic demand growth to a more sustainable pace has created some room for monetary easing. However, high inflation continues to limit this near-term. We expect further rate cuts in 2013 to stimulate growth (following a 25bps cut in December 2012), taking the repurchase rate to 7.00%. However, we now expect a 50bps rate cut in Q3-2013, versus Q2-2013 previously, amid concerns that further policy easing could fuel inflationary pressures."

BoP surplus to support rupee gains…

Prolonged weakness in the global economy continues to undermine external demand; however, the balance of payments (BoP) is likely to remain in surplus in 2013, the bank said.

"The central bank expects a USD 500mn BoP surplus, marginally higher than the USD100mn surplus achieved in 2012, as lower imports narrow the trade deficit further and higher tourism earnings and workers’ remittances continue to offset weak export demand. The current account should continue to improve marginally in 2013, as oil prices are relatively stable and energy imports show signs of a structural decline on increased hydropower generation.

"The capital account should also pose limited risk to the Sri Lankan rupee (LKR). The government has signalled that it does not intend to issue a sovereign bond in 2013, and the authorities are unlikely to support another year of LKR depreciation in light of debt dynamics. As such, we are constructive on the LKR, forecasting USD-LKR at 126.5 by end-2013.

"At the conclusion of its Article IV consultation with Sri Lanka in February 2013, the IMF said that the government still needs to implement significant reforms such as improving tax administration, reducing losses at state-owned enterprises, and promoting exports to strengthen revenue streams. This may have contributed to Sri Lanka not obtaining a fresh USD 1bn IMF loan to provide budget support for infrastructure projects. The key risk arising from not getting the new loan is that Sri Lanka’s FX reserves may again dwindle due to higher import spending."

Market outlook…

"Given still-high CPI inflation and the reduced likelihood of policy rate cuts before Q3-2013, we remain Neutral on T-bond duration," Standard Chartered Bank said.

"Although the surprise rate cut in December pushed the 5Y T-bonds to a one-year high in mid-January, the gains were not sustained. Since then, the 5Y T-bond yield has increased by c.40bps, bear steepening the yield curve. We expect demand and supply in the T-bond market to be balanced, and look to shift our duration stance to Overweight once CPI inflation eases."

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