I told you tax cut scenarios negative impact, so thats the reason i sold my most of PF
ECONOMYNEXT – The outlook on Sri Lanka’s sovereign credit has been downgraded to ‘negative’ from ‘stable’ over recent tax cuts, but has confirmed an underlying rating of ‘B’.
“Revision of the Outlook to Negative from Stable reflects rising risks to debt sustainability from a significant shift in fiscal policy and the potential for roll-back of fiscal and economic reforms in the aftermath of November’s Presidential elections,” Fitch said in a statement.
“We believe the departure from the previous revenue-based fiscal consolidation path has created policy uncertainty and increased external financing risk for the sovereign, particularly given the large external debt repayments due in 2020 and beyond.”
Fitch said the value added tax cut and nation building tax could result in a loss of revenue of up to 2 percent gross domestic product and national debt is likely to move up.
“Following the tax cuts, Fitch projects that gross general government debt, currently at about 85% of GDP, will be on an upward trajectory over the medium-term in the absence of off-setting measures,: the rating agency said.
“Fitch believes the authorities still aim to reduce the deficit to below 4.0% of GDP over the medium-term in line with their previous consolidation plans.
However, the announced tax measures create uncertainty about the feasibility of these plans.”
Sri Lanka is expecting the cut spending mainly on capital projects.
“Fitch expects these offsetting measures, such as adjustments to excise taxes and spending cuts on non-priority public investment and recurrent expenditure, to mitigate part of the revenue loss from the tax announcement,” the rating agency said.
“However, the agency nevertheless expects the deficit to widen by about 1.5% of GDP relative to our previous forecasts.
Fitch is expecting a deficit of 6.5 percent for 2020 and 6.2 percent for 2021.
The full statement is reproduced below
Fitch Revises Outlook on Sri Lanka to Negative; Affirms at ‘B’
18 DEC 2019 09:04 AM ET
Fitch Ratings – Hong Kong – 18 December 2019:
Fitch Ratings has revised the Outlook on Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and has affirmed the IDR at ‘B’.
KEY RATING DRIVERS
Revision of the Outlook to Negative from Stable reflects rising risks to debt sustainability from a significant shift in fiscal policy and the potential for roll-back of fiscal and economic reforms in the aftermath of November’s Presidential elections. We believe the departure from the previous revenue-based fiscal consolidation path has created policy uncertainty and increased external financing risk for the sovereign, particularly given the large external debt repayments due in 2020 and beyond.
Newly appointed President Gotabaya Rajapaksa announced sweeping tax cuts soon after taking office, including a revision of the value-added tax (VAT) rate to 8% from 15% (the rate applicable to financial services has been kept at 15%), an increase in the liable limit for VAT registration to LKR300 million, scrapping of the nation building tax, lowering the income tax rate for the highest income bracket to 18%, from 24%, and changing the withholding tax regime, among others.
Fitch’s preliminary estimates show that the VAT rate change and the scrapping of the nation building tax could alone lower revenue by as much as 2% of GDP in the absence of off-setting measures; VAT accounted for 24% of government revenues in 2018.
The authorities have identified offsetting revenue and expenditure measures that they believe would make these tax cuts revenue neutral. These include a hike in the excise duty on liquor and cigarettes, which accounts for about 10% of VAT revenue, and an increase in the Ports and Airports Development Levy to 10.0%, from 7.5%. In addition, financial services, which account for 15% of VAT, will not be affected by the rate cut.
The authorities project the expenditure adjustment to come mainly from a cutback in public investment.
Fitch expects these offsetting measures, such as adjustments to excise taxes and spending cuts on non-priority public investment and recurrent expenditure, to mitigate part of the revenue loss from the tax announcement. However, the agency nevertheless expects the deficit to widen by about 1.5% of GDP relative to our previous forecasts.
Fitch has revised its budget deficit projection to 6.5% of GDP for 2020 and 6.2% for 2021, which are higher than the authorities’ estimates, from 5.0% previously in both years.
Following the tax cuts, Fitch projects that gross general government debt, currently at about 85% of GDP, will be on an upward trajectory over the medium-term in the absence of off-setting measures.
Fitch believes the authorities still aim to reduce the deficit to below 4.0% of GDP over the medium-term in line with their previous consolidation plans. However, the announced tax measures create uncertainty about the feasibility of these plans.
The outlook for the completion of the seventh and final review under the Extended Fund Facility arrangement with the IMF now seems uncertain and discussions of a new programme after the parliamentary elections expected in April 2020 could be complicated by the tax cuts.
Fitch acknowledges that the tax cut announcement has come during the early period of the new administration and that further policy announcements will follow, which could mitigate some fiscal issues. However, we believe the initial evidence of a roll-back of the revenue-driven fiscal consolidation path is negative for the sovereign’s creditworthiness.
The ‘B’ IDR also reflects the following key rating drivers:
Fitch expects growth to pick up to 3.5% in 2020 and 3.7% in 2021, from 2.8% in 2019. These forecasts reflect our expectation of a boost to growth in the short-term from the tax cuts, higher agricultural output and an ongoing recovery in tourism following last April’s terrorist bombings. Remittances are also likely to remain supportive of domestic demand.
Sri Lanka’s external balance sheet is weak, with external debt obligations totalling approximately USD19.0 billion coming due between 2020-2023, compared with foreign-exchange reserves of around USD7.5 billion as of end-November 2019. We expect the current account deficit to widen to about 3.0% of GDP in 2020 and 2021, from an estimated 2.2% in 2019, as domestic demand strengthens.
Large interest payments as a share of revenue, at about 46.0% (current peer median 10.2%), a low revenue ratio and a very high public debt/revenue ratio of 643% continue to highlight the weak structure of Sri Lanka’s public finances. In addition, foreign-currency debt is nearly half of total government debt and leaves public finances vulnerable to renewed currency depreciation.
Sri Lanka’s basic human-development indicators, including education standards, are high compared with the ‘B’ median, as it ranks in the 60th percentile of the UN’s Human Development Index compared with the 35th percentile of the current ‘B’ median. Furthermore, the country’s per capita income of USD4,023 (Fitch estimate as of end-2019) is somewhat higher than the current ‘B’ median of USD3,311.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Sri Lanka a score equivalent to a rating of ‘B+’ on the Long-Term Foreign-Currency IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows:
– External Finances: -1 notch to reflect high sovereign external refinancing needs against relatively low foreign-currency reserves that leave the external position vulnerable to any adverse shifts in investor sentiment.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR.
Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that individually, or collectively, could trigger a downgrade are:
– Failure to place the gross general government debt/GDP ratio on a downward path due to wider budget deficits or the crystallisation on the sovereign balance sheet of contingent liabilities that are linked to state-owned entities or government-guaranteed debt.
– Increase in external sovereign funding stresses that threaten the government’s ability to meet upcoming debt maturities, particularly in the event of a loss of confidence by international investors.
– A further deterioration in policy coherence and credibility, leading to lower GDP growth and/or macroeconomic instability.
The main factors that, individually or collectively, could lead to a revision of the Outlook to Stable:
– Stronger public finances, underpinned by a credible medium-term fiscal strategy that places gross general government debt/GDP on a downward path, accompanied by higher government revenue.
– Improvement in external finances, supported by lower net external debt or a reduction in refinancing risk; for example, from a lengthening of debt maturities or increased foreign-exchange reserves.
– Improved macroeconomic policy coherence and credibility, evidenced by more predictable policy-making and a track record of meeting previously announced economic and financial targets.
KEY ASSUMPTIONS
– Global economic outcomes are consistent with Fitch’s latest Global Economic Outlook report.
ESG CONSIDERATIONS
– Sri Lanka has an ESG relevance score of ‘5’ for political stability and rights, as World Bank governance indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
– Sri Lanka has an ESG relevance score of ‘5’ for rule of law, institutional and regulatory quality and control of corruption, as World Bank governance indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
– Sri Lanka has an ESG relevance score of ‘4’ for human rights and political freedom, as World Bank governance indicators have the highest weight in Fitch’s SRM and are relevant to the rating and a rating driver.
– Sri Lanka has an ESG relevance score of ‘4’ for creditors’ rights, as willingness to service and repay debt is relevant to the rating and a rating driver, as for all sovereigns.
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. Now I'm waiting to ASI going to below 5600 
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