Bangkok--22 Sep--Moody's Investors
Moody's Investors Service has assigned a B1 foreign currency issuer rating to the government of Sri Lanka. The outlook is stable.
RATINGS RATIONALE
The end of Sri Lanka's civil conflict and a structural improvement in its economic prospects were important considerations for the ratings decision.
The stable outlook balances ongoing policy efforts to improve fiscal and balance of payments fundamentals and maintain low inflation, against a large, albeit improving, government debt overhang.
Sri Lanka's ratings are based on four key methodological factors:
1. Low economic strength: derived from a small, relatively open and lower-middle income economy, which has grown appreciably despite the long civil war and several external shocks. A sustained track record of rapid economic growth with reasonable external balance and restrained inflation which, coupled with further diversification of the economic base, could support an improved assessment of the country's economic strength.
2. Medium institutional strength: supported chiefly by reasonably strong monetary management through the long civil war, strategic policy reforms and initiatives undertaken during the conflict, and a strong relationship with official creditors and key bilateral partners. This sets the stage for a sustained rebound in the economy. Moody's assessment also incorporates the World Bank's moderate rankings for Sri Lanka for rule of law and government effectiveness. The development of contractual savings institutions and fairly broad domestic financial markets have helped to accommodate the sovereign's large fiscal financing needs.
3. Low government financial strength: reflects the government's large debt and debt service burden, and lingering external vulnerabilities, which Moody's recognizes as being largely due to wartime circumstances.
However, these risks are being offset by growing foreign investor interest and improvement in domestic competitiveness, which should support the balance of payments position. There are also proposed fiscal reforms which are expected to lower future budget deficits. Moreover, the country's improving growth prospects and a downshift in local interest rates will also support the government's debt dynamics.
4. Medium susceptibility to event risk: reflects the resilience of Sri Lanka's constitutional democracy, which has withstood a prolonged civil conflict that has left its core policy institutions and resident confidence un-damaged. However, financial and contingent liability risks, relative to the sovereign's strained balance sheet and lingering external financing risks, are still considered as constraints, although these may ease over time.
Rating outlook:
"The stable outlook on the B1 foreign currency sovereign rating encapsulates our expectation that the re-integration of the northern and eastern regions into Sri Lanka's economy will sustain a higher growth rate with single-digit inflation without destabilizing the external current account position. The outlook also reflects considerable scope for fiscal reforms and high likelihood of foreign investment inflows against lingering risks posed by a large government debt overhang and remaining, though, diminishing, external financing risks," says Mr.
Aninda Mitra, a Moody's Vice President and lead sovereign analyst for Sri Lanka.
"The stable outlook also considers Sri Lanka's small size, partial dollarization, and relatively modest gross domestic savings. We therefore place more forward-looking credit emphasis on an improvement in fiscal management, which is an area where reforms are planned, but a track record is awaited," adds Mitra.
What Could Change the Rating -- Up:
An improvement in the government's fiscal and debt positions; lower and less volatile inflation; and, sustainable improvements in foreign currency reserve adequacy, supported in particular by larger foreign direct investment inflows.
What Could Change the Rating -- Down:
Failure to progress on fiscal consolidation, or a loss of inflation control, and a substantial worsening of the country's external balance and foreign currency liquidity position. A reversal of recently achieved political stability, which could adversely impact resident and foreign investor confidence.
The principal methodology used in rating The Government of Sri Lanka was Sovereign Bond Ratings rating methodology published in September 2008.
Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information.
Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.
MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Singapore
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308