Fitch affirms Sri Lanka at ‘BB-’; Outlook Stable

Fitch Ratings yesterday affirmed Sri Lanka’s LongTerm Foreign and Local Currency IDRs at ‘BB-’.

The issue ratings on Sri Lanka’s senior unsecured foreign and local currency bonds are also affirmed at ‘BB-’. The Outlooks on the Long-Term IDRs are Stable.

The Country Ceiling is affirmed at ‘BB-’ and the Short-Term Foreign Currency IDR at ‘B’.

“Real GDP growth is relatively high and less volatile compared with its peers. The five-year average of 6.7 percent compares well with the 3.6 percent median for peers in the ‘BB’ rating category (sovereigns rated ‘BB-’, ‘BB’ and ‘BB+’),” the rating agency said.

Fitch expects real GDP growth to stabilise in 2014 at the recorded 7.3 percent in 2013 and to rise to 7.5 percent in 2015. A pick-up in tourism will continue to support growth.

“Official data do not point to overheating of the economy, as inflation (4.2 percent in March) and credit growth (4.4 percent in February) are low.

However, average inflation over the past five years has been high (6.2 percent) and volatile compared with peers (5.0 percent median for the ‘BB’ peer group) and the potential for a build-up of future imbalances exists.

The authorities’ pro-growth bias is illustrated by persistent “twin deficits” and easing monetary policy measures since December 2012, even at high real GDP growth levels.”

However, Fitch said the public finances are weak relative to peers despite fiscal consolida- tion.

“Both the budget balance (-5.9 percent of GDP in 2013) and government debt burden (78.3 percent of GDP in 2013) are more than double the ‘BB’ category medians of -2.7 percent and 35.9 percent of GDP, respectively.

The 2014 budget signals commitment to medium-term debt reduction to maintain a gradual fiscal consolidation path, although the process is slow and to a large extent built on revenue projections that may turn out too optimistic.”

Meanwhile, quantitative easing by the U.S. Federal Reserve has so far not led to severe market pressures for Sri Lanka, Fitch said.

“The country benefitted less than many other emerging markets from the QE-related search for yield given its relatively closed capital account. The government has been able to secure some US dollar financing through issuance on the bond markets twice in 2014.”