External sector vulnerability remains high: Moody’s

Sri Lanka’s short-term debt maturing within a year remains elevated even above the total foreign reserves, posing a significant external risk to the country in the event of sudden halt in external credit extension, Moody’s Investors Services said releasing a special observation on Sri Lanka.

Measured by Moody’s External Vulnerability Indicator (EVI), which gauges whether 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 percent in 2013, significantly above the 100 percent threshold of reserve coverage for external creditors.

“This is partly because higher commercial bank issuances, which are classified as banking sector exter- nal liabilities, have contributed to outstanding short-term debt,” Moody’s said.

Nevertheless the expectation for 2013 demonstrates a slight improvement from 132 percent a year before.

The United States head quartered leading rating agency sharing the view of many economists is of the opinion that a new International Monetary Fund (IMF) program would have helped to build up foreign reserves, negating the EVI to a certain extent and more significantly would have boosted the much required international investor confidence at a time when the country is in the hunt for foreign direct investments (FDIs).

IMF mission Chief, John Nelmes who was here last month held a similar view to that of Moody’s and opined a ratio of short term debt to international reserves maturing in less than a year was a commonly used yardstick to measure the status of the external reserves position of a country against the number of months of imports which the Lankan authorities are obsessed with.

Nevertheless the country’s dwindling foreign exchange reserves due to sterilized foreign exchange sales did not recover to its peak of US $ 8.1 billion (July 2011) despite imposing duties on consumergoods imports, abandoning a de facto peg to the dollar and curbing credit growth. As of January 2013, its foreign reserves stood at $6.9 billion equivalent to 4.3 months of imports.

“Although the likely amount (perhaps around US $1-1.5 billion) would be a moderate figure in relation to the US$ 3-4 billion current account deficit and relatively high EVI, this measure would have boosted confidence with positive effects in boosting private capital inflows,” Moody’s opined in its special comment titled ‘The Post-IMF Backdrop: Downward Growth Pressures and Elevated External Pressures’.