Large Sri Lanka Firms Strong Enough. New capital Expenditure Commitments to Slow Down in South Asia Except for Sri Lanka - Standard & Poor's

01st February 2012, www.island.lk

Large companies in India, Pakistan, and Sri Lanka are strong enough to withstand the effects of a slowdown in demand and a rise in input costs and country risks. Nevertheless, the credit quality of a large number of their smaller peers is likely to deteriorate. That is according to a report, titled "Increased Country Risk And Reduced Demand To Test Most South Asia Companies In 2012," that Standard & Poor’s Ratings Services published yesterday (Feb 01).

"The outlook on most of the companies that we rate in South Asia is stable. These companies are generally large in their respective markets and have diversified operations, experienced managements, and strong financial resources. This should help them sustain their credit profiles," said Standard & Poor’s credit analyst Mehul Sukkawala.

Nevertheless, South Asia companies are vulnerable to any further weakening in domestic demand in 2012. That’s because their respective governments have limited capability to provide a fiscal boost in the face of a domestic or global crisis.

The report notes that country risk continues to play an important role in the credit profile of companies in South Asia. The risk has increased in India and Pakistan in the past two years. The rise in risk in India is due to a perceived increase in corruption and uncertainty in policies. Political turmoil and an energy crisis have raised country risk in Pakistan. Such risks make it harder for companies to manage their cash flows, form long-term strategies, and proceed with investment plans.

In India, the government is engaging with the industry to address policy issues, but we have yet to see any significant positive actions.

"We expect new capital expenditure commitments to continue to slow down in South Asia, with the exception of Sri Lanka. The slowdown is most intense for projects in the electric utilities, and metals and mining sectors," said Mr. Sukkawala.

We anticipate that liquidity for companies we rate in the region will remain adequate to strong because of companies’ large cash balances, strong banking relationships, and access to capital," S&P said.