Moody's Gives Sri Lanka B1 Sovereign Rating with a Stable Outlook

22nd September 2010, www.lankabusinessonline.com

Moody's Investors Service said it had given a 'B1' sovereign rating for Sri Lanka with a 'stable' outlook on the end of a war, low inflation and efforts to contain budget deficit, despite having high levels of debt.

"The stable outlook also considers Sri Lanka's small size, partial dollarization, and relatively modest gross domestic savings," Aninda Mitra, Moody's lead sovereign analyst for sri Lanka said in a statement.

"We therefore place more forward-looking credit emphasis on an improvement in fiscal management, which is an area where reforms are planned, but a track record is awaited."

He said the rating agency expected the "re-integration of the northern and eastern regions into Sri Lanka's economy will sustain a higher growth rate with single-digit inflation without destabilizing the external current account position."

In second quarter of 2010 Sri Lanka's economy grew by 8.5 percent, according to the country's statistics office.

"The outlook also reflects considerable scope for fiscal reforms and high likelihood of foreign investment inflows against lingering risks posed by a large government debt overhang and remaining, though, diminishing, external financing risks," Mitra said.

The end of Sri Lanka's civil conflict and a structural improvement in its economic prospects were important considerations for the ratings decision, Moody's said.

The rating agency said monetary management was "reasonably strong" relationships with official creditors and bilateral partners were strong setting the stage for a sustained rebound in the economy.

The agency had noted "moderate" rankings for rule of law and government effectiveness by the World Bank.

Fitch Ratings lifted the outlook for Sri Lanka 'B+' speculative rating to 'positive' from stable Tuesday and Standard & Poors' upgraded the underlying rating to 'B+' earlier. Sri Lanka is now in the market for a billion US dollar sovereign bond.

Government officials are taking part in an investor meeting in New York this week.

Moody's said government financial strength was low, with a large debt and debt service largely due to a war, but investor interest was improving. Sri Lanka's national debt is about 80 percent of the economy.

"There are also proposed fiscal reforms which are expected to lower future budget deficits," Moody's said.

"Moreover, the country's improving growth prospects and a downshift in local interest rates will also support the government's debt dynamics."

Ratings could be upgraded if budgets improve and inflation is low and less volatile, foreign reserves and foreign direct investment improves, Moody's said.

But ratings could be downgraded if there is no progress in improving budgets, there is loss of inflation control and foreign currency liquidity worsens, or recent political instability worsens local or foreign investor confidence.

Related Info:

S&P Raises Sri Lanka’s Ratings. B+ for Foreign Currency Debt with a Stable Outlook

Fitch Affirms Sri Lanka's LTIDR B+. Revised Outlook to Positive from Stable