Bangkok--16 Oct--Standard & Poor's
--The policy program under the IMF standby loan agreement may herald modest fiscal improvement, and underpins an improved balance of payments position.
--We revised the outlook on the sovereign credit ratings to positive from stable.
--We affirmed the 'B' long-term foreign currency and 'B+' local currency sovereign credit ratings, as well as the ratings on senior unsecured bonds.
Standard & Poor's Ratings Services today revised the outlook on the Democratic Socialist Republic of Sri Lanka to positive from stable. At the same time, Standard & Poor's affirmed its 'B' long-term foreign currency and 'B+' long-term 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 Sri Lanka's senior unsecured debt and the 'B+' transfer and convertibility assessment. The recovery rating of '4' on Sri Lanka's senior unsecured foreign currency debt has also been affirmed, which signals our expectation of an average recovery of 30%-50% in the event of a distressed debt exchange or payment default.
"The outlook change takes into account the continued strengthening of Sri Lanka's balance of payments position, and reflects Standard & Poor's expectation that the IMF Standby Loan Program will be pursued to its conclusion, engendering modest improvement in public finances," said Standard & Poor's credit analyst Agost Benard.
The swift recovery in Sri Lanka's foreign currency reserves is propelled by both fundamental and market factors. It is underpinned by investor recognition that the civil war has ended decisively, and that the IMF program is now in place, with a reasonable degree of likelihood that it will be completed.
Aside from cross-border investment in the government bond market, reserves are also improving on account of rising remittances and rebound in tourism receipts, combined with a significantly narrowed trade deficit. Foreign direct investment flows are expected to add to these inflows with some lag.
The ratings on Sri Lanka remain constrained by a high public debt burden and underlying perennially large fiscal deficits. Fiscal shortfalls averaged 7.8% of GDP over the past decade, and net general government debt of 80.3% of GDP (2008) imposes a high debt service burden with an estimated 33% of general government revenues needed for interest payments. These metrics are well above the median for similarly rated sovereigns and remain a source of significant vulnerability to macroeconomic and external stability.
The positive outlook reflects our assessment of an increased likelihood of progress in addressing prevailing structural fiscal weaknesses. The Tax Commission whose mandate forms part of the IMF adjustment program will help promote some modest broadening of the tax base, which over time, should yield improvements in public finances.
The ratings on Sri Lanka could be raised on evidence of continued implementation of the IMF program, including progress in expanding revenue-generation capacity following the Tax Commission's recommendations.
"The rating, however, could come under downward pressure in the event of substantial deviation from the IMF program or early termination of it, or if expectations on recovery in growth prospects and revenue improvements disappoint," Mr. Benard said.
RELATED RESEARCH
This article is based in part on the following criteria article:
"Sovereign Credit Ratings: A Primer," published May 29, 2008, on RatingsDirect.
See also "Asia-Pacific Sovereign Report Card: Amid Encouraging Signs, A Bumpy Road Lies Ahead," published June 9, 2009.
Complete ratings information is available to RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can 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.
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
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