SL amongst weakest debt affordability countries: Moody’s

Despite the country’s debt ratios have steadily improved during the last decade, Sri Lanka remains among the countries with the weakest debt affordability, a United States-based leading rating agency said.

“The fiscal burden of servicing this debt is high and interest payments amounted to as much as 38 percent of revenues in 2011. Debt affordability, according to this measure remains amongst the weakest of all rated sovereigns, barring that of Lebanon (B1/ Stable),” Moody’s Investor Services said in a special comment on the Sri Lankan economy.

Country’s debt to GDP has steadily improved from a peak of 105.6 percent in 2002 to 78.5 percent in 2011 because of strong economic growth and high inflation. However, the ratio deteriorated to 81 percent in 2012 due to the one off increase of Rs.278 billion in public debt as a result of the 10 percent depreciation of the rupee by December 2012.

“But this figure appears opti- mistic; in our view, the ratio likely came close to 85 percent. External debt has been primarily concessional in nature, but this trend is reversing as Sri Lanka has attained ‘middle income emerging market status’ and increasingly depends on commercial financing,” Moody’s opines.

On the fiscal front, while appreciating the efforts to narrow down the deficit to the targeted levels of 6.2 percent (though reportedly due to delays in current expenditure cash payments), Moody’s illustrat- ed that the country’s fiscal deficit remains significantly above the peer medians of around 3.6 percent.

This level of deficit is predominantly due to structural issues given a low revenue to the GDP ratio (at 14 percent of the GDP, this figure is amongst the lowest of all rated emerging market sovereigns), as well as high recurrent spending on interest payments, salaries and subsidies.

“An important fiscal parameter that remains a drag on public finances is the performance of state-owned enterprises and specifically those in the transport and energy sector that are loss-making, largely because of uneconomical pricing policies. These impose significant contingent liabilities,” it said urging price reforms.

In 2012, the combined losses of the state oil and electricity companies, the Ceylon Petroleum Corporation and the Ceylon Electricity Board, increased to 2 percent of the GDP.

“On the other hand, reduced dependence on external financing of the deficit is a credit positive development (currently rated at B1/Positive). Deficit financing had been divided almost equally between foreign and domestic sources. For 2013, however, the budgeted share of foreign financing has been reduced to 17 percent, from 44 percent the previous year, while the share of domestic financing has increased to 83 percent from 56 percent in 2012,” Moody’s commented.

(DK)