CB says rating action based on uncorroborated facts

In response to the decision by Fitch and S&P to downgrade Sri Lanka, the Central Bank yesterday said the rating actions were based on uncorroborated facts on the country’s macroeconomic fundamentals.

“In spite of the recent developments in the country’s political sphere, an array of measures has been taken by the CBSL and the government to minimize any potential impact from the recent political developments on the economy, especially with regard to external financing requirements and debt payment obligations, the Central Bank said.

“In meeting the Government’s external liabilities of International Sovereign Bond (ISB) maturities of US$ 1 billion in January 2019 and US$ 500 million in April 2019, the authorities have already built a buffer fund from proceeds of non-strategic asset divestment and recently contracted Syndicated loan, in addition to the space provided under the Active Liability Management (ALM) initiative not exceeding a limit of Rs. 310 billion,” the Central Bank added.

The Central Bank also said plans to raise around US $ 750 to US $ 1 billion during the remainder of the year and in early 2019 through the issuance of Sri Lanka Development Bonds, sourced through enhanced credit lines for state banks from Middle East and East Asia is nearing completion.

Further, the enhancement of US $ 500 million to the syndicated loan arrangement by February 2019 is also in progress.

In addition, the Central Bank said further support could be expected from the proceeds of about US $ 600 million expected as disbursements from bilateral and multilateral agencies during next year.

“These proceeds together with the available funds would more than cover all the ISB payments due in 2019,” the Central Bank noted.

Meanwhile, with the aim of further strengthening the reserve adequacy, the Central Bank has initiated negotiations with central banks and regional funds such as SAARC Swap Framework to obtain foreign currency SWAP facilities.

“These measures would not only further strengthen the country’s foreign reserve adequacy, they would also enable timely servicing of external obligations while providing the space for intervening cautiously in the foreign exchange market to prevent excessive volatility.

It is noteworthy that there has been a favourable adjustment in the exchange rate during recent days supported by rising foreign currency inflows which would be further enhanced in the upcoming holiday and New Year season. In addition, the fiscal and macro prudential measures that are already in place are expected to result in an improvement in the external trade balance as well, thus reducing pressure on external reserves and the exchange rate,” the Central Bank said.

Meanwhile, the Central Bank noted that domestic financing conditions have shown considerable improvement through spaces created and debt management strategies introduced recently.

“This has reduced the roll-over requirement of Treasury bonds and SLDBS in 2019, 2020 and in the medium-term. Notably, the new acquisition of government securities by the banking sector has increased by only 1.5 percent in 2018 as against the trend increase of around 5 per cent in recent years.” The Central Bank also stressed that Sri Lanka’s banking and financial sector remains resilient to both domestic and external vulnerabilities.

“Given these parameters, the CBSL is of the view that the recent rating actions by Fitch Ratings and S&P Global Ratings are unwarranted.

Such an action only on the premise of heightened political uncertainty, with no evidence of slippages in macroeconomic policies or fundamentals, cannot be justified. The soundness of the underlying macroeconomic conditions was reinforced by the fact that staff-level agreement in principle was reached with the IMF (26 October 2018) on the fifth review of the Extended Fund Facility (EFF),” the Central Bank said.