Sri Lanka faces growth pres­sures: Moody's

The Pak Banker - - COMPANIES/BOSS -

Global rat­ing agency Moody's says that Sri Lanka's econ­omy faces slower growth and el­e­vated ex­ter­nal pres­sure in the year ahead. Although the government will likely con­tinue to make grad­ual progress in re­duc­ing its deficit, the debt bur­den will re­main high. The ab­sence of a new fund­ing pro­gram is credit neg­a­tive from the per­spec­tives of ex­ter­nal pay­ments and growth.

The spe­cial com­ment ex­am­ines the credit im­pli­ca­tions of Sri Lanka's (B1/Pos­i­tive) de­ci­sion on 12 Fe­bru­ary to not seek a new fund­ing pro­gram from the IMF, fol­low­ing the suc­cess­ful com­ple­tion of a $2.6 bil­lion Standby Ar­range­ment in 2012.

The report also looks at key fac­tors that will shape the credit out­look go­ing for­ward; in par­tic­u­lar, trends in growth and macro sta­bil­ity, the ex­ter­nal pay­ments po­si­tion, and progress on fis­cal con­sol­i­da­tion. The B1 rat­ing on Sri Lanka takes into ac­count the no­table progress that the coun­try has made over the last three years, since the civil war ended in May 2009. How­ever, given the chal­leng­ing macroe­co­nomic back­drop, the report's con­clu­sion is that a fol­low-up fund­ing pro­gram would have aug­mented in­ter­na­tional re­serves di­rectly through bor­rowed IMF re­sources. Through en­hanced pol­icy cer­tainty un­der an IMF fund­ing pro­gram, in­vestor con­fi­dence would likely have been bol­stered. And in do­ing so, it would have pro­vided ad­di­tional sup­port to the bal­ance of pay­ments and eco­nomic growth prospects.

Global rat­ing agency Moody's be­lieves the government will con­tinue to re­duce grad­u­ally its bud­get deficit, but the com­po­si­tion of deficit re­duc­tion will be key. Sup­plier cash ar­rears, weak struc­tural rev­enue re­form and con­tin­gent li­a­bil­i­ties in the SOE sec­tor are con­cerns. More­over, high in­fla­tion and rapid credit growth are risks to macroe­co­nomic sta­bil­ity. While there was a mod­est ac­cre­tion to for­eign re­serves in 2012, at $6.9bil­lion cur­rently, re­serves are still not back to the peak of $8.1 bil­lion in July 2011, when Sri Lanka's rat­ing out­look was changed to pos­i­tive. Moody's Ex­ter­nal Vul­ner­a­bil­ity In­di­ca­tor (EVI) - which gauges if for­eign re­serves are ad­e­quate to cover short-term ex­ter­nal debt and long-term debt ma­tur­ing over the next year in the event of sud­den stop in ex­ter­nal credit ex­ten­sion - is ex­pected to re­main high at 124% in 2013, from 132% in 2012. This level is ap­pre­cia­bly above the 100% thresh­old of re­serve cov­er­age for ex­ter­nal cred­i­tors. This is partly be­cause higher com­mer­cial bank is­suances, which are clas­si­fied as bank­ing sec­tor ex­ter­nal li­a­bil­i­ties have contributed to out­stand­ing short­term debt.

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