Bangkok--26 Aug--Standard & Poor's
-- The ratings balance improved external liquidity against fiscal weaknesses.
-- The IMF standby loan agreement may help condition policy formulation and aid in maintaining adequate external liquidity.
-- We affirmed the long-term 'B' foreign currency and 'B+' local currency sovereign credit ratings.
-- The outlook on the sovereign ratings is stable.
Standard & Poor's Ratings Services today said it had revised the outlook on the Democratic Socialist Republic of Sri Lanka to stable from negative. At the same time, Standard & Poor's affirmed its 'B' long-term foreign currency and 'B+' local currency sovereign credit ratings on Sri Lanka. We also affirmed the 'B' short-term ratings on the sovereign.
Standard & Poor's also affirmed all the issue ratings on the country's debt, and maintained its 'B+' Transfer & Convertibility assessment on Sri Lanka. We also affirmed our recovery rating of '4' on Sri Lanka's senior unsecured debt, indicating our expectation of an average recovery of 30%-50% in the event of a distressed debt exchange or payment default.
"We revised the outlook to stable and affirmed the ratings to reflect Sri Lanka's improved external liquidity position and better prospects for policy formulation under the aegis of the new IMF standby loan agreement (SBA) of SDR1.65 billion (US$2.6 billion)," Standard & Poor's credit analyst Agost Benard said.
Sri Lanka's gross international reserves have increased to the currently reported US$2.9 billion from a low of US$1.3 billion in March 2009. Nonresident purchases of government domestic debt plus the first disbursement of SDR207 million under the SBA were major inflows in the balance of payments in recent months. Sri Lanka's gross external financing requirement will remain high, at a projected 135% of current account receipts plus usable reserves in 2009. However, we expect the ratio to improve as the central bank further builds reserves and as private and public transfers narrow the country's current account deficit. Sri Lanka's reliance on portfolio flows will be a source of vulnerability in its financial account. But we believe that the central bank's commitment under the SBA to reducing its advances to the government, to maintaining a flexible exchange rate, to keeping interest rates positive in real terms, and to refrain from tightening foreign exchange controls will help strengthen investor confidence in Sri Lanka and mitigate some of these balance of payment risks.
At the same time, under the IMF program, the government has committed to reduce its fiscal deficits to 5% of GDP by 2011 from the 7% of GDP targeted for this year. Although we forecast that the exigencies of post-war reconstruction may result in some deviation from plan, we do not expect that these slippages will be great enough to derail the SBA, as long as the government's relations with donors remain good.
The stable outlook balances improved external liquidity against prevailing large fiscal deficits and the associated debt and interest burdens. The ratings could be raised if government policies lead to a sustainable boost in tax revenues and reduced fiscal imbalances, such that debt ratios become more aligned with the median for this rating category. Conversely, the ratings would come under downward pressure if the public debt trajectory tilts upward. The ratings would also come under downward pressure if external liquidity pressures are renewed.
Ratings information is available to RatingsDirect subscribers at www.ratingsdirect.com. It can also be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Find a Rating. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.
Media Contact:
David Wargin, New York (1) 212.438.1579, [email protected]
Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
David T Beers, London (44) 20-7176-7101
Sovereign Ratings
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