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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Lower inflation to support Sri Lanka's sovereign rating: S&P

Lower inflation to support Sri Lanka's sovereign rating: S&P

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Aug 17, 2013 (LBO) - A low inflation level maintained by Sri Lanka's central bank is likely to support its credit rating in the future, a senior sovereign credit analyst at Standard & Poor's said.

Sri Lanka's inflation eased to 6.1 percent in the 12 months to July from after spiking to 9.8 percent in February following a steep depreciation of the currency over the past 12 months.

Central Bank Governor Nivard Cabraal said Friday that inflation had been kept at single digits for 4.5 years and from next year a mid-single digit inflation of 4-6 percent will be targeted.

"This factor is probably likely to be a supporting factor for the rating over the next few years," Kim Eng Tan senior director, Asia-Pacific Sovereign Ratings at Standard & Poor's said at a business forum in Colombo.

The credibility of the monetary authority was one key factor in analyzing sovereign credit at Standard & Poor's, he said in addition to factors such as debt, budgeting, external balances, institutional and government effectiveness.

Sri Lanka has a 'B+' rating, four levels below investment grade from S&P. Sri Lanka is planning to reach investment grade or at least 'BBB-' in the next three to four years.

Exchange rate flexibility will also help improve, the rating, Tan said.

Sri Lanka fiscal side was still weak with about 70 percent debt to gross domestic product ratio and the tax base was narrow and expenditure inflexible, he said.

But S&P expects tighter fiscal policy in the future, and higher economic growth to help reduce the debt.

A lower inflation target is likely bring greater stability to the economy, analysts say as monetary policy is likely to be tightened earlier preventing credit bubbles from developing.

Sri Lanka's last credit bubble, worsened by borrowings from loss-making state enterprises generated a balance of payments crisis because rates were not allowed to rise early enough as credit demand rose.
http://www.lankabusinessonline.com/news/lower-inflation-to-support-sri-lankas-sovereign-rating:-s&p/1160496892

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