Aug 01 -
--We expect Sri Lanka's gross international reserves to remain at a similar level to that in 2012, at three months' coverage of current account receipts.
--We are affirming our 'B+' long-term and B' short-term sovereign credit ratings on Sri Lanka.
--The stable outlook reflects our view that the country has strong prospects for per capita real GDP growth over the next few years and the government's fiscal profile is improving; at the same time, Sri Lanka's external liquidity is vulnerable and it has high fiscal and external debt.
Standard & Poor's Ratings Services said today that it had affirmed its 'B+' long-term and 'B' short-term sovereign credit ratings on the Democratic Socialist Republic of Sri Lanka. The outlook on the long-term rating is stable. Our transfer and convertibility assessment remains 'B+'. We also affirmed our 'B+' issue rating on Sri Lanka's outstanding notes.
"We affirmed the ratings to reflect our view that Sri Lanka has weak external liquidity, moderately high and increasing external debt, and a weighty government debt and interest burden. In addition, some of the country's political institutions lack extensive checks and balances," said Standard & Poor's credit analyst Takahira Ogawa.
Sri Lanka's robust growth prospects support the ratings. Growth drivers include government measures to reconstruct the northern districts, improve the finances of public enterprises, and limit inflation to single digits.
Sri Lanka's external liquidity remains exposed to international liquidity conditions. Through 2015, we project that Sri Lanka's gross external financing needs will exceed 120% of current account receipts (CAR) plus usable reserves. We also forecast that the country's external debt--net of official reserves and financial sector external assets-will be more than 100% of CAR.
We expect Sri Lanka's gross international reserves to remain at three months' coverage of current account payments in December 2013, a similar level to that in 2012. That's despite decisive action from the government and the central bank in early 2012 to improve the country's external position, through allowing the Sri Lankan rupee to depreciate and reining in credit expansion.
Fundamental fiscal weaknesses remain although the government's fiscal metrics have improved over the past three years. We project the annual growth in general government debt will be 7.4% of GDP on average for 2013-2016. We expect net general government debt to decline to 71% of GDP at year-end 2015 from 77% of GDP in 2012 because of robust nominal GDP growth and some fiscal consolidation. We project that the attendant interest burden will comprise more than a third of government revenue through 2015. We also expect inflation to decline gradually this year.
The country's favorable growth prospects are highlighted in our projection that investment will edge up toward 30% of GDP on continued reconstruction and strong public sector investments. This trend should boost per capita real GDP growth to 6% each year in the next few years from about 5.5% currently.
"The stable outlook reflects our view that the growth prospects for Sri Lanka's per capita real GDP will be more than 5.5% in the next few years and the government's fiscal profile could improve," said Mr. Ogawa. "These strengths are balanced against the country's vulnerable external liquidity and high fiscal and external debt. We also expect Sri Lanka to keep in check the pace of credit expansion and its net external liability position."
We may raise the rating if Sri Lanka's external and fiscal indicators improve more than we currently forecast, given well-designed policy and robust implementation. Conversely, we may lower the rating if the country's external liquidity deteriorates or if Sri Lanka's growth and revenue prospects fall below our current expectations.
RELATED CRITERIA AND RESEARCH
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
General Criteria: Methodology For Linking Short-Term And Long-Term
Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013
Full Analysis: Sri Lanka (Democratic Socialist Republic of), Dec. 13, 2012
Banking Industry Country Risk Assessment: Sri Lanka , Nov. 19, 2012 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.