Bangkok--25 Jul--Standard & Poor's
Standard & Poor's Ratings Services today assigned its 'B+' long-term foreign currency issue rating to a US$1 billion global senior unsecured bond issuance by the Democratic Socialist Republic of Sri Lanka (foreign currency B+/Positive/B; local currency BB-/Stable/B). The bonds will have a fixed coupon of 6.25% and will mature on July 27, 2021.
The rating reflects Sri Lanka's fundamental fiscal weaknesses and the attendant high public debt and interest burden. A narrow tax base, the burden of the civil conflict, extensive subsidies, and a bloated public sector contributed to the country's fiscal deficit of 8% of GDP on average over the past decade. General government debt amounted to 82% of GDP at end-2010 and would have been higher if not eroded by double-digit inflation over much of the period.
The rating also incorporates our expectation of a gradual improvement in Sri Lanka's public finances, via tax reform and better management of government-owned companies. Improving external liquidity is another positive rating factor. Investor confidence has risen with the end of the war and the one-year extension of the Standby Loan Program of the International Monetary Fund (IMF). The country's foreign exchange reserves can cover four months' current account payments. A return to single-digit inflation, and improved growth prospects are also supporting factors for the rating.
The positive outlook on the foreign currency rating reflects Sri Lanka's improving external liquidity, inflation close to that of trading partners, and the government's progress in addressing structural fiscal weaknesses. Standard & Poor's may equalize the local and foreign currency ratings if Sri Lanka makes balanced progress in addressing the external and domestic weaknesses. Disproportionate fiscal progress without any monetary slippage could result in our maintaining the one-notch distinction in an upgrade. Conversely, we may lower the ratings or revise the outlook to stable if Sri Lanka substantially deviates from the IMF program, or if its growth and revenue prospects begin to ebb.
RELATED CRITERIA AND RESEARCH
Sri Lanka Foreign Currency Rating Outlook Revised to Positive On Improved External Liquidity; Ratings Affirmed, July 19, 2011
Sovereign Government Rating Methodology And Assumptions, June 30, 2011
Full Analysis: Sri Lanka (Democratic Socialist Republic of), Dec. 27, 2010
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Media Contact:
John Piecuch, New York (1) 212 438.1579,
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Analyst Contacts:
Takahira Ogawa, Singapore (65) 6239-6342
Agost Benard, Singapore (65) 6239-6347