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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Moody’s hails Lanka’s policy

Moody’s hails Lanka’s policy

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1Moody’s hails Lanka’s policy Empty Moody’s hails Lanka’s policy Mon Jul 22, 2013 4:56 pm

sashimaal

sashimaal
Manager - Equity Analytics
Manager - Equity Analytics
Moody’s Investors Service says that the policies of the government have stabilized Sri Lanka’s (B1 stable) overall credit profile, although benefits from the post-civil war peace dividend have waned.

Moody’s assessment was contained in its annual “Credit Analysis Sri Lanka” which assesses economic strength as low; institutional strength as moderate; government financial strength as low; and susceptibility to event risk as moderate. Sri Lanka’s B1 sovereign bond rating reflects Moody’s methodological assessment of these factors.

In July, Moody’s revised the outlook on the sovereign rating to stable, from positive. The action was prompted by: (1) the stabilization in Sri Lanka’s external payments position following the sizable loss of foreign reserves in 2011, but without enough improvement to support a rating upgrade; and (2) the pause in government debt consolidation.

The latest report is an update and does not constitute a rating action.

The report notes that while economic growth has slowed, to 6.4% in 2012 from an average of 8.1% in 2010 and 2011, the previous faster pace of growth was accompanied by an overheating of the economy. The slowdown is primarily a result of the implementation of adjustment reforms in early 2012.

Looking ahead, Moody’s projects that growth will be 6% to 7% in 2013 and 2014. At this pace, inflation should remain in the single digit range, although the policies of the government will likely continue to have a growth bias.

Furthermore, although government debt has declined after the end of the nearly three-decade long civil war in 2009, debt reduction has stalled in the past two years and government bond yields widened in both nominal and real terms, as the fiscal payoffs from the peace dividend have dissipated. Moody’s expects the government debt to GDP ratio to touch 80% in 2013 and 78% in 2014, broadly unchanged since 2011 and compared with 86% in 2009.

At the same time, Moody’s notes that Sri Lanka has financed its current account deficit largely via debt, and while the government expects foreign direct investment inflows to pick up in 2013, such a situation will have little immediate effect on changing a debt-dependent external financing profile.

However, overall, Moody’s says that Sri Lanka’s economy has benefited from political stability in the aftermath of the civil war, and continued progress in reconciliation and integration of the Northeast region will boost the employment of the country’s economic resources and lead to a higher long-term growth rate

http://colombogazette.com/2013/07/22/moodys-hails-lankas-policy/

sashimaal

sashimaal
Manager - Equity Analytics
Manager - Equity Analytics
July 22, 2013 (LBO) - Sri Lanka's credit profile has stabilized but external debt and debt servicing costs are rising, Moody's Investors Services, which has rated the country 'B1' said in a credit update.

Earlier in July, the agency cut the outlook to stable saying the country has stabilized following balance of payments trouble but there was not enough progress for an upgrade and debt consolidation has paused.
Moody's said Sri Lanka had low debt affordability with revenue to debt ratio. After falling to 37.6 percent in 2011, down from an even high 42.7 percent in 2009, at the end of a 30-year war, it had again rise to 20.7 percent in 2012.

Moody's expected the trend to continue "likely bringing it back to the level seen at the end of the civil war."

Sri Lanka's debt to gross domestic product has declined to 78.4 percent in 2011 from more than 100 percent, but has since started rising, with contingent liabilities in state enterprises also rising.

Sri Lanka's government debt ratio was higher than a 'B1' peer median of 46 percent but 75 percent of domestic debt was medium to long term captive debt and about a half of foreign debt was concessional.

Sri Lanka's external commercial borrowings have risen to 943 billion rupees in 2012 from 411 billion rupees in 2009, including foreign-held rupee Treasuries.

Analysts have said that rupee Treasuries are the most dangerous to the economy, as a sell-down could squeeze the banking sector and debt markets, raise interest rates and any liquidity injections to sterilize forex sales by the Central Bank could trigger a full-blown balance of payments crisis.

Dollar denominated market debt has no effect in the domestic banking system, other than a maturity.

This year, state-run National Savings Bank was expected to borrow a billion rupees in two installments after the central government decided not to go direct to the market. Moody's said the funds are expected to be used for infrastructure.

About 73 percent of total spending was current spending, though there were some improvements. Of the current spending 91 percent was for interest payments, salaries and subsidies, which the agency said diverted resources from public investment.
In Sri Lanka the state runs a deficit in the current account of its budget and the entire capital budget and a part of its current budget is financed by debt. State energy, airline and transport enterprises also run losses.

"These losses crowd out private investment and raise contingent liabilities," Moody's said.

State enterprises losses reduce the domestic savings rate.

This year substantial corrections are expected in losses of state petroleum and electricity utilities, Moody's said.

The finance ministry expected the Ceylon Electricity Board expects to cut losses to 38 billion rupees in 2012 from 61 billion in 2012 and Ceylon Petroleum Corporation to 20 billion rupees from 91 billion a year earlier.

"We believe this target is aggressive and could be negated by higher fuel imports and a depreciation of the LKR (Sri Lanka rupee)" Moody's said.

http://www.lankabusinessonline.com/news/sri-lanka-credit-profile-stabilized,-but-burdens-rising:-moodys/651043642

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