Standard & Poor’s Raised Outlook on Sri Lanka’s Credit Rating to Stable

25th August 2009, www.bloomberg.com

Standard & Poor’s Ratings Services raised its outlook on Sri Lanka’s credit rating to stable from negative, noting improved foreign-exchange reserves after a $2.6 billion loan from the International Monetary Fund.

The credit assessor today affirmed Sri Lanka’s long-term foreign currency debt rating at ‘B’, which is five levels below investment grade.

The IMF on July 27 said its 20-month arrangement that immediately provided $322 million was aimed at helping the island nation avert a balance of payments crisis. Sri Lanka plans to sell $500 million of dollar-denominated debt overseas to help finance rebuilding after ending the Tamil Tiger rebels’ 26-year quest for a separate homeland.

“This would strengthen Sri Lanka’s external financing situation and permit the dedication of resources toward postwar reconstruction efforts,” said Anushka Shah, an economist at Citigroup Global Markets in Mumbai.

Sri Lanka’s foreign-exchange reserves will rise to $3 billion from $2.1 billion at the end of July, boosted by foreign purchases of local debt, central bank Governor Nivard Cabraal said on Aug. 20. The assets have climbed 71 percent in four months and are above the level stipulated in the loan agreement with the IMF, the central bank said Aug. 4. The reserves had dipped to an eight-year low of $1.27 billion in March.

Growth Forecast

The aid package and improved investor confidence after the end of the civil war have helped attract foreign funds and eased local borrowing costs, the central bank said July 23. Governor Nivard Cabraal has driven down interest rates to a three-year low, taking advantage of easing inflation to spur spending and make up for slowing exports.

The central bank last month raised its 2009 growth forecast to as much as 4.5 percent from an earlier estimate of 2.5 percent, citing increased investments and reconstruction projects.

Sri Lanka plans to focus spending in the government’s 2010 budget on rebuilding areas liberated from the Liberation Tigers of Tamil Eelam rebels, according to the Ministry of Finance.

“Although we forecast that the exigencies of postwar reconstruction may result in some deviation from plan, we do not expect that these slippages will be great enough to derail the standby agreement, as long as the government’s relations with donors remain good,” S&P said today.

Sri Lanka aims to cut its budget deficit to 5 percent of gross domestic product and maintain flexibility in the exchange rate to build reserves to cover 3 1/2 months of imports by the end of the IMF lending program.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.