S&P Says Sri Lanka at Lower Risk of Social Unrest due to Popular Govt, High Growth & Low Unemployment

08th March 2011, www.island.lk

With inflation pressures mounting in Asia, Sri Lanka is ranked among countries that have lower risks of social unrest because of popular governments, higher growth and lower unemployment mitigating such risks caused by rising prices.

Sovereign ratings agency Standard and Poor’s Corporation (S&P) releasing a ratings report for the Asian region said inflation posed a risk to economic and social stability. The countries facing this risk included Sri Lanka, India, Pakistan, Bangladesh, Vietnam, Indonesia, Mongolia, Cambodia, Cook Islands and Fiji.

India has already experienced protests over rising prices during the past few weeks.

But S&P goes on to say the risk of social unrest was mitigated in some countries.

"In a number of countries, the risk of social unrest is present but mitigating factors are currently strong," S&P said, naming Sri Lanka along with China, Vietnam, Malaysia, and Cambodia in this group. "The risks in these countries are mitigated by some combination of strong growth, low unemployment, and popular support for the government," the ratings agency said.

Economic growth for Sri Lanka is forecast by the Central Bank at 8.5 percent although the IMF and others have forecast growth around the 7 percent range. Unemployment is below 6 percent.

While many countries in the region have begun to tighten monetary policy interest rates, the Central Bank yesterday kept rates steady in the hope that the domestic food supply would recover after devastating floods earlier this year. However, the bank remains concerned about global commodity prices, with oil already trading above US$ 100 per barrel.

S&P also said high credit growth in Sri Lanka needs to be watched closely. Domestic banks’ total lending to the private sector as at end December 2010 reached Rs. 1,333.8 million, up 27.8 percent from a year earlier which was Rs. 1,043.8 billion.

But the Central Bank and the International Monetary Fund (IMF) are not concerned about monetary policy right now, with the latter saying it was in the right place. However, if oil prices continue to increase, it would have to be passed down to consumers, according to the IMF.

"Sri Lanka’s monetary policy remains accommodative, with a 50 basis point cut in policy rates in January going against the regional and global trends—underscoring the government’s priority on maintaining high growth," S & P said.

It also said the government’s budget performance was ‘improving modestly’.

"We may raise the ratings on Sri Lanka on evidence of more comprehensive fiscal or structural economic reforms, resulting in faster-than-expected reduction of the vulnerabilities posed by the high debt and interest burdens, and still-narrow economic profile," S & P said, but warns, "We may lower the rating if Sri Lanka deviates substantially from the IMF program’s framework, or if expectations on the recovery in growth prospects and revenue improvements disappoint."

Maintaining low inflation and low interest rates were difficult with lax fiscal discipline in the past. The Institute of Policy Studies called the fiscal performance the bane of Sri Lanka’s macroeconomic stability, and the Central Bank warned the government against reckless spending in 2010.

According to the Central Bank, the inflation rate and interest rates in Sri Lanka are higher than most other countries in the region, while many of them hiking interest rates to curb inflation, Sri Lanka has decided to keep in steady.

Authorities are expected to engage officials of S&P and other ratings agencies (Fitch and Moody’s) next month for sovereign rating reviews.

Related Info :

• Sri Lanka Sovereign Strategy Brings Results, Says Central Bank