Sri Lanka Vulnerable to External Shocks - Moody's

04th January 2012, www.lankabusinessonline.com

Sri Lanka is still vulnerable to external shocks given, lower than expected year-end foreign exchange reserves and needs lasting reforms to better its credit rating, Moody's, a rating agency has said.

The island must further reduce government debt and budget deficits while a rapid and lasting improvement in credit strength depends on how successful ongoing reforms are, Moody's Investors Service said in a credit report.

Sri Lanka's B1 rating and positive outlook for its foreign-currency obligations is based on an assessment of the country's low economic and government financial strengths, moderate institutional strengths and moderate susceptibility to event risks, it said.

The report notes that the positive outlook announced in July 2011 was prompted by an increasingly evident peace dividend, after the end of a 30-year ethnic war in 2009.

This was seen in greater macroeconomic and financial stability, a policy orientation of fiscal reform and economic growth, supported by a successful IMF program, and a reduction in political event risk following the end of the war, the rating agency said.

"However, a deepening current account deficit and lower-than-expected foreign exchange reserve level projected for the end of 2011 suggests that external vulnerability event risk has not yet receded to a low level and remains moderate," it said.

Moody's assessment of government financial strength would improve if it continues to reduce debt, recently enacted fiscal reforms continue to perform well, and if strong economic growth is sustained and the external balance of payments strengthen over time.

A peace dividend in the form of a pick-up in economic growth, if sustained, should translate into greater credit strength.

"The pace and permanence of an improvement in credit fundamentals will also be determined by the success of ongoing structural and fiscal reforms," said Moody's annual report on Sri Lanka.

The country's economic scale and diversity, and per capita income level, are in line with most single B-rated sovereigns.

The rating agency said it sees financial weaknesses as a key rating constraint arising from the legacy of large budget deficits from the civil war years, and which have contributed to a large government "debt overhang."

Sri Lanka's fiscal space and flexibility are "constrained", in comparison to most other sovereigns, and could prove vulnerable to shocks, although contingent liabilities from state enterprises and the banking sector are currently remote, Moody's said.

Moody's will continue to place credit emphasis on an improvement in fiscal management in future because of Sri Lanka's shallow capital markets and relatively modest level of gross domestic savings.

It noted that with a population of 20 million and a 50 billion US dollar economy in 2010, Sri Lanka is wealthier than all its neighbors in the Indian subcontinent by per-capita income.

"Yet Sri Lanka's 5,040 dollar per capita income, on a purchasing power basis (as of 2010), is slightly lower than the Ba3- to B2-peer median of 5,152 dollars," Moody's said.

However, the rating agency praised Sri Lanka's debt service record saying: "Another noteworthy point is an unblemished track record of debt-servicing."

Sri Lanka has never restructured, or defaulted on sovereign debt, except for a voluntary relaxation of payment terms by the Paris Club in 2005 on account of the tsunami in December 2004, Moody's said.

This affected 227 million dollars in principal and interest payments out of the then-external debt stock of 13 billion dollars.

However, the rating agency also noted that Sri Lanka's political risk has not come down to low levels with no sign yet of a permanent solution to the ethnic conflict which gave rise to violence.

"In combination with a relatively low level of per capita income overall, its political Voice and Accountability governance indicator points to a heightened susceptibility to domestic political event risk," said the Moody's report.

"The reintegration of the Tamil minority in the war-torn northeast region is progressing, but the process of political reconciliation is at an early stage."

Related Info :

• Fitch and Moody's Upgrade Sri Lanka's Sovereign Rating due to Key Factors

Fitch and Moody's Upgrade Sri Lanka's Sovereign Rating due to Key Factors

24th July 2011, www.sundayobserver.lk

Fitch Ratings has upgraded Sri Lanka's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB-' from 'B+'. The outlooks on these ratings are 'Stable'.

Further, Fitch has upgraded the Country Ceiling to 'BB-' from 'B+' and affirmed the Short-Term Foreign-Currency IDR at 'B'.

Meanwhile, Moody's Investors Service has upgraded outlook of Sri Lanka's B1 foreign currency sovereign rating from 'Stable' to 'Positive' due to the key factors - increasingly evident peace dividend reflected in greater macroeconomic and financial stability; policy orientation of fiscal reform and economic growth, supported by a successful IMF program; improving external payments position; and reduction in political event risk following the end of terrorism in 2009.

Fitch's decision to upgrade the ratings was based on the stabilis ation and recovery of the economy and increased efforts by the Government to bring down the budget deficit.

Moody's has said that augmented investor confidence and the increase in investments along with the falling inflation, the economy is expected to expand sustainably by 8-9 percent in the medium term.

The Central Bank has welcomed the upgrade and is confident that the measures taken towards macroeconomic stability and economic improvement would yield further favourable results.

Related Info :

• Sri Lanka Raises $ 1bn 10yr Sovereign Bond Riding on the Country’s Recovery Story and Positive Reviews by Rating Agencies

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

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

Sri Lanka Raises $ 1bn 10yr Sovereign Bond Riding on the Country’s Recovery Story and Positive Reviews by Rating Agencies

22nd July 2011, www.financeasia.com, By Denise Wee

Markets have hardly been conducive to new debt issues recently, but Sri Lanka took advantage of a brief calm early yesterday morning to successfully price a $1 billion 10-year global bond.

Sri Lanka is used to dealing with bigger problems than volatile financial markets, and the once war-torn country’s ability to raise such a large amount of money at a competitive yield is testament to just how far it has come since the civil war ended in 2009 — and contrasts sharply with the experience of its embattled European peers.

Bank of America, Merrill Lynch, Barclays Capital, HSBC and Royal Bank of Scotland were joint bookrunners for the deal. Bank of Ceylon acted as a co-manager.

The leads kicked off roadshows on July 11 and decided to push ahead with pricing slightly ahead of schedule as they saw a window to launch a transaction amid relatively stable markets. They released initial guidance in the area of 6.5% on Wednesday morning ahead of officials wrapping up one-on-one meetings with investors in London later that day.

During midday London time, the leads revised guidance to 6.25% to 6.375%. Momentum for the transaction continued to build and the order book reached more than $5 billion before the US opened. The bonds eventually priced at the tight end of that final guidance, offering a spread of 332.2bp over US Treasuries.

While it was on the road, Sri Lanka also received a vote of confidence from the rating agencies. Fitch upgraded its rating on Sri Lanka to BB- from B+ on July 18, citing the country’s stabilisation and economic recovery under the IMF programme, as well as its efforts to address its budget deficit. Moody’s and S&P both revised their outlooks on Sri Lanka to positive but kept their ratings at B1 and B+ respectively.

“Sri Lanka has come a long way,” said one person familiar with the deal. “We are getting bad news out of Europe on an almost daily basis, so we were pleasantly surprised when the deal was done at a coupon of 6.25%,” he added.

The deal appealed to the US emerging market and global funds, which saw rarity value in the deal. Sri Lanka tapped the market just 10 months ago, but has fewer outstanding bonds than Indonesia and the Philippines.

The final book stood at $7.5 billion, with orders from 315 accounts. US investors were allocated 43%, Europe was allocated 30% and Asia 27%. Fund managers were allocated the biggest share with 86%, banks/private banks were allocated 8%, corporates 3% and insurers 3%.

The rush of fund flows from the US into emerging market sovereigns — which started in 2009 and accelerated last year — has tapered off slightly this year as investors have turned defensive. However, Sri Lanka has shown that there is still ample demand in the US for the right credit.

Malaysia’s $2 billion sukuk global bond, in contrast, attracted a more muted response from US investors, who were allocated just 4% of the five-year tranche and 15% of the 10-year tranche.

Sri Lanka’s bonds traded at 101.5 in the secondary market yesterday morning, rising 1.5 points from the par issue price.

The deal is Sri Lanka’s second 10-year issue. The sovereign priced its debut $1 billion 10-year global bond in September last year via arrangers Bank of America Merrill Lynch, HSBC and Royal Bank of Scotland. That deal paid a similar coupon of 6.25% but offered a higher spread of 373.1bp over Treasuries. As a spread over Treasuries, Sri Lanka paid roughly 40bp less in its latest deal.

According to one person familiar with the deal, the Sri Lanka bonds maturing October 2020 were trading at a yield of 6.1% while the new bonds were being marketed. Taking into account the US Treasury yield curve, the nine-month extension was worth about 14bp. This put the theoretical value of the new 10-year bond maturing July 21, 2021 at about 6.24%, which meant that the new bonds came with hardly any new issue premium. Following the pricing of the deal, the existing Sri Lanka October 2020s rallied and were quoted at 102.5 and a yield of 5.9%.
Related Info :

• Sri Lanka's $1bn Bond to be Managed by HSBC, Bank of America & Royal Bank of Scotland

• Sri Lanka's $ 1bn 10yr Sovereign Bond May Yield 6.5pct and Expected to be Comfortably Oversubscribed

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

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

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

Upward Revision of Sovereign Ratings on Sri Lanka Expected with Favourable Recommendations from Three Major Rating Agencies

22nd May 2010, www.sundaytimes.lk

Sri Lanka expects an upward revision in sovereign ratings with favourable recommendations from officials from three major rating agencies who are expected to visit the island before the end of this month to review the current country rating.

They will hold meetings with Central Bank (CB) officials, politicians, financial experts, diplomats, foreign lending agencies, etc and report their findings to the rating committee, a senior CB official said.
CB Deputy Governor Dharma Dheerasinghe, who is also the head of the country’s high level Sovereign Rating Committee, told the Business Times that teams of analysts from Standard & Poor (S&P), Fitch and Moody would be visiting the island separately to prepare individual reports to review the ratings which will be forwarded to their top level committees to make the final decision.“The committee meetings will be held in London and New York in July and we are also visiting them to present our case,” he said.

The committee made up of top CB, Finance Ministry and private sector representatives had been appointed to develop a strategy to push Sri Lanka's sovereign rating to investment grade. It is charged with devising a strategy of taking Sri Lanka’s current speculative B+ (Fitch) and B (S&P) rating to an investment grade 'BBB-' or higher over the next four years. Dr. Dheerasinghe noted that "S&P may raise the ratings on Sri Lanka on evidence of more comprehensive fiscal or structural economic reforms”.

At the moment the country’s rating is B+ and “we hope that it will be upgraded by these committees based on the reports of these analysts,” he said adding that they expect an upgrade in the sovereign rating to minimum grade of BBB –or higher.

However an economic expert who wished to be anonymous told the Business Times that S&P 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."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,” he revealed.

Last year Sri Lanka received a B1 sovereign rating from Moody’s with a stable outlook and officials are confident there would be an upgrade given the government’s improved fiscal performance for 2010, with the deficit reaching 7.9% of GDP, slightly lower than the 8 % target. S&P had given Sri Lanka a long term foreign currency rating of B+ and a long term local currency rating of BB-, both upward revisions from 2009. Fitch has affirmed Sri Lanka’s long term local and foreign currency issuer default rate at B+, revising the outlook from stable to positive.

Related Info :

• Sri Lanka to Sell $1bn 10yr Sovereign Dollar Bond in September to Fund Infrastructure & Retire Expensive Loans. Roadshows in London/Singapore/New York

• Sri Lanka Rating Upgrade Expected in the Next Review in May

• Barclays Recommends Sri Lanka’s Debt over Vietnamese Dollar Bonds with Sri Lanka's Improving Rating & Economy

Barclays Recommends Sri Lanka’s Debt over Vietnamese Dollar Bonds with Sri Lanka's Improving Rating & Economy

17th December 2010, www.bloomberg.com

Investors should sell Vietnam’s 10- year dollar bonds and buy Sri Lankan debt after Moody’s Investors Service cut the Southeast Asian nation’s credit rating, according to Barclays Plc.

Moody’s lowered Vietnam’s long-term foreign-currency rating to B1, four levels below investment grade, from Ba3 on Dec. 15. The ratings company cited the risk of a balance of payments crisis, a drop in foreign reserves, quickening inflation and the weakening dong for the assessment. Concern about what policy directives the ruling Communist Party will take at its 11th National Congress next month also reduces the debt’s appeal, Barclays analysts wrote in a research report today.

“We believe there should be more clarity on the policy direction for growth, inflation and the currency when the National Congress has completed,” according to the report headed by Singapore-based economist Prakriti Sofat.

Barclays is recommending Sri Lanka’s debt because it says the country’s rating may be upgraded due to improvements in the budget and the balance of payments. The nation is rated B1 by Moody’s and that may be raised by one level next year, a separate Barclays report said last week.

“We remain constructive on the Sri Lankan sovereign given its gradually improving budget position, upbeat growth outlook, robust balance of payments and rising foreign-currency reserves,” Sofat wrote.

Yield Premiums
The yield on Vietnam’s 6.75 percent dollar-denominated note due January 2020 has climbed 21 basis points since the Moody’s announcement to 6.31 percent as of 1:35 p.m. in Hanoi, according to prices from the Royal Bank of Scotland Group. That’s the highest level since July. The yield on Sri Lanka’s 6.25 percent U.S. currency bond due October 2020 has advanced 14 basis points in the same period to 6.25 percent, RBS prices show.

The extra yield investors demand to hold Vietnam’s debt over U.S. Treasuries widened 38 basis points to 279 yesterday, according to JPMorgan Chase & Co.’s EMBI Global Diversified Sovereign Spread Index. For Sri Lanka, the premium climbed 13 basis points to 260, near a record low of 247 reached on Dec. 15.

The cost of protecting Vietnam’s sovereign bonds from default for five years has increased 24 basis points this week to 286, according to CMA prices.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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

Sri Lanka $1bn Bond Issue Closes in 14 Hours Attracting $6.3bn Bids

Sovereign Bond Investors Should Turn to Sri Lanka over Vietnam Says Nomura

Sri Lanka Sovereign Strategy Brings Results, Says Central Bank

24th September 2010, www.island.lk

The Central Bank last afternoon said the medium term sovereign rating strategy brought positive results.

"Sri Lanka’s sovereign credit rating has been upgraded by the international rating agencies, Standard & Poor’s (S&P) and Fitch Ratings, who have recently assigned improved credit ratings to the country. A third rating agency, Moody’s Investors Service, has also assigned a comparable credit rating to Sri Lanka, as given below.

* On 14 September 2010, Standard & Poor’s (S&P) upgraded Sri Lanka’s long-term foreign currency sovereign credit rating to B+ and the long term local currency rating to BB- with a stable outlook.

* On 21 September 2010, Fitch Ratings affirmed Sri Lanka’s long term foreign and local currency Issuer Default Ratings (IDR) at B+ while upgrading the outlook to "Positive".

* On 22 September 2010, Moody’s Investors Service assigned a B1 foreign currency issuer rating with a stable outlook.

Given the many positive developments in the country during the post-conflict period, these rating upgrades have been expected. The improved macroeconomic fundamentals, prudent monetary policy, fiscal consolidation, planned structural

improvements of the economy, and high economic growth prospects will further support the enhancement of Sri Lanka’s sovereign credit rating in the near to medium term," the Central Bank said in a statement.

"These upgrades could be viewed as an outcome of the strategy towards upgrading Sri Lanka’s sovereign rating over the medium term. For this purpose the CBSL recently appointed a high level Sovereign Rating Committee (SRC), comprising senior officials

of the Ministry of Finance and Planning (MOFP), CBSL, and some private sector leaders. The SRC has been assigned to make regular reviews on the developments of the economy and have negotiations with the rating agencies through Rating Advisors towards upgrading the country’s sovereign rating," it said.

The Central Bank has also upgraded the forecast for economic growth to between 7.5 and 8 percent given the robust 8.5 percent growth in GDP during the second quarter of the year, from 7.1 percent the previous quarter. Sri Lanka’s economy grew by 3.5 percent in 2009.

All three ratings agencies said the government’s fiscal performance would have to improve if ratings are to be improved in future. The budget deficit for 2009 ballooned to 9.9 percent of GDP from an estimated target of 7 percent.

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

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

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

Sri Lanka to Seek Ratings from Moody's, Standard & Poor’s & Fitch Before $1bn Sovereign Bond Issue

10th August 2010, www.bloomberg.com

Sri Lanka is seeking a rating of its sovereign debt from Moody’s Investors Service ahead of a planned $1 billion overseas bond sale, central bank Assistant Governor C.J.P. Siriwardena said.

The South Asian nation last month announced plans to sell the bonds, with maturities of as much as 10 years, by the end of 2010 to help refinance expensive loans. Moody’s doesn’t have a credit rating for Sri Lanka, while Standard & Poor’s and Fitch Ratings place the country’s long-term foreign-currency debt at non-investment grade.

“This is the ideal time to get a rating from all the three agencies,” Siriwardena said in a telephone interview today from Colombo. He said the economy is poised to grow more than 7 percent this year after the end of the country’s civil war.

Sri Lankan troops defeated the separatist Liberation Tigers of Tamil Eelam in May 2009 and ended their 26-year struggle for a separate homeland, boosting growth prospects.

S&P and Fitch raised their outlook on Sri Lanka’s debt in October last year. S&P revised it to positive from stable, and assigned the nation’s long-term foreign-currency debt rating at B, five levels below investment grade. Fitch changed the outlook to stable from negative. It affirmed Sri Lanka’s rating at B+, four levels below investment grade.

Moody’s Visit

Representatives from Moody’s are in the island nation this week to meet with senior government and central bank officials, Siriwardena said. He said Fitch and S&P officials will also visit Sri Lanka this month to assess the economy.

“Sri Lanka should get a rating upgrade of at least one notch since the economy is now very robust,” said Sarath Rajapakse, director of research at Capital Trust Securities Ltd. in Colombo. “The bond offering will attract strong demand.”

The benchmark Colombo All-Share Index rose 4.1 percent to 5063.98 at 1:53 p.m. local time. The yield on the benchmark four-year bond was little changed at 9.3 percent, according to Standard Chartered Plc.

This year’s overseas debt sale will be the third by the nation since its debut offering in October 2007.

The nation’s last global bond sale in October attracted bids for more than 13 times the $500 million offered.

President Mahinda Rajapaksa’s government is aiming to accelerate growth to at least 7 percent in 2010, the fastest pace in four years.

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

Sri Lanka to be Rated by Moody's to Assess Sovereign Rating

06th August 2010, www.news360.lk

Sri Lanka has invited international rating firm Moody’s to assess the country’s “Sovereign Rating”.

Deputy Governor of the Central Bank K.G.D.D. Dheerasinghe citing reasons for the latest move said “We want to have ratings from all 3 top rating agencies”.

Accordingly Moody’s will join Fitch Ratings and S&P who is already assessing Sri Lanka’s sovereign rating.

A team from Moody’s will visit Sri Lanka next Monday to hold discussions with the Government officials including the Central Bankers.

Apart from the team from Moody’s, rating teams from both Fitch and S&P also will arrive in Sri Lanka during the next week to hold discussions with the Government officials.

All 3 are expected to come out with their annual country ratings on Sri Lanka following the planned meetings.

Sri Lanka is also looking to get a rating upgrade before it enters the international capital markets next month to raise US$ 1 billion via a sovereign bond.

An official of the Public debt department said “having a rating upgrade will help the country to be in a sound footing, when it start to raise dollars from the global market place”

In 2009 October Fitch upgraded Sri Lanka’s Sovereign rating to “B +” and announced the outlook as “stable” while S&P too in the same month upgraded the country rating to ‘B” and converted the outlook from “stable” to “positive”.

Report By: Prasanna C. Rodrigo, Email him on: news360@sltnet.lk