Central Bank strongly challenges Moody’s ‘latest rating decision’

The Central Bank ( CB) on Wednesday strongly challenged a decision by Moody’s Investors Service ( Moody's) on Monday ( November 20) to downgrade the Government of Sri Lanka's foreign currency issuer and senior unsecured ratings from B1 (Negative) to B2 (Stable).

The CB said the downgrading does not properly reflect the country’s macroeconomic fundamentals, and ( was) therefore unwarranted.

Sri Lanka’s macroeconomic position has neither deteriorated nor has there been any policy slippage since Moody’s last rating decision in July 2018, in spite of the recent developments in the country’s political sphere, the CB said in a strong rebuttal of the Moody’s rating.

“In fact, based on satisfactory programme performance, the Sri Lankan authorities and the International Monetary Fund (IMF) reached staff-lev- el agreement following the fifth review of the Extended Fund Facility ( EFF) programme on October 26 and the agreement was to be announced on October 29. The programme discussions are currently on hold, pending clarity on the political situation,” the CB said.

It said Sri Lanka’s current level of gross official reserves (GOR) amounting to US$7.2 billion is sufficient for the country to meet its external debt obligations in the period ahead. In addition, as a precautionary measure, the CB has initiated negotiations with central banks of friendly nations with regard to obtaining foreign currency SWAP facilities of sizable amounts.

These measures will further strengthen the country’s foreign reserve adequacy, and would enable timely servicing of external obligations while intervening cautiously in the foreign exchange market to prevent a disorderly adjustment of the exchange rate. 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 CB noted.

Arrangements have already been made to ensure Sri Lanka’s track record of meeting debt obligations on time is sustained. In order to meet the Government’s external liabilities of International Sovereign Bond ( ISB) maturities of $1 billion in January 2019 and $ 500 million in April 2019, the authorities have already built a buffer fund from proceeds of the divestment of Hambantota port and the syndicated loan of China Development Bank ( CDB). The space provided under the Active Liability Management initiative not exceeding a limit of Rs. 310 billion also provides for building required buff- ers and spaces to meet future debt service payments. In addition, the issuance of Sri Lanka Development Bonds (SLDBs) of around $750 million to $1 billion during the remainder of the year and in early 2019 is now at an advanced stage of completion.

“These investments would be sourced through enhanced credit lines for state banks from West Asia and East Asia, together with remittance and tourism related inflows. In addition, the $ 500 million enhancement, in February 2019, to the syndicated loan obtained from the CDB is also on track. This means that by February 2019 more than $2 billion will be mobilised. This would more than cover all the ISB payments due in 2019. In addition the buffer can be further built up through $ 600 million expected as disbursements from bilateral and multilateral agencies during next year,” the CB statement said.

Meanwhile, 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. The Treasury bond maturities, which amounted to over Rs. 600 billion in 2018, are lower in 2019 and 2020, amounting to around Rs. 450 billion and Rs. 290 billion, respectively. Similarly, SLDB maturities, which amounted to around $2.3 billion in 2018, have also been reduced to around $0.62 billion and $0.82 billion in 2019 and 2020, respectively. Further, the new acquisition of government securities by the banking sector has increased by only 1.5 per cent in 2018 as against the trend increase of around 5 per cent in recent years. These developments along with resource availability among institutional investors highlight the substantial space that exists to meet financing requirements from the domestic market. Continued fiscal consolidation, particularly with the positive primary balance and the Active Liability Management initiatives, are expected to further strengthen the government’s fiscal operations in 2019 and in the medium term.

“Given these parameters, the CB is of the view that the recent rating action by Moody’s is unwarranted. Such an action only on the premise of heightened political uncertainty, with no evidence of slippages in macroeconomic policies, cannot be justified,” the statement added.