Fitch & Standard & Poor’s Warn Sri Lanka on Its Weak External Position and the Risk to Sovereign Credit Rating

01st March 2012, www.ft.lk

Fitch and Standard & Poor’s rating agencies yesterday warned Sri Lanka that its sovereign credit rating was at risk due to the country’s weak external position and the depletion of its foreign currency reserves to protect the rupee exchange rate.

The country’s Central Bank, which is under a $ 2.6 billion International Monetary Fund (IMF) loan programme, for months last year disregarded the global lender’s warning that the policy of defending the rupee was unsustainable.


The monetary authority blew through more than $ 2.7 billion in the second half of last year staving off depreciation pressure, cutting its forex reserves by a third. At the same time, rising oil prices produced a record trade gap.

Fitch in a special report said the sharp drop in reserves in the second half of 2011 has increased the risks on the sustainability of the country’s balance-of-payments.

Going a step further, S&P revised down the country’s sovereign rating outlook to stable from positive due to the external imbalances stemming from a decline in the reserves. “We revised our outlook on the long-term foreign currency rating to reflect the country’s deteriorating external liquidity,” S&P Credit Analyst Takahira Ogawa said.

S&P said it may lower the rating if there is “substantial further deterioration” of external liquidity or if Sri Lanka’s growth and revenue prospects fall below expectations.
“Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance-of-payments on a more sustainable footing,” Fitch Sovereign Team Director Philip McNicholas said in a statement.

Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight, and thus adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings, Fitch said.

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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.

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 :

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• 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

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

Sri Lanka's Sovereign Rating Upgraded by an Agency

21st November 2010, www.sundaytimes.lk, By Bandula Sirimanna

Sri Lanka's sovereign rating has been upgraded by one notch since the economy is now very robust. This was a result of the Central Bank's efforts to implement a carefully designed, forward looking and effective strategy with the participation and co-operation of all stakeholders, country authorities, private sector business leaders, chambers and rating advisors, during the past few months, a member of the high level Sovereign Rating Committee, told the Business Times.

The committee makes regular reviews of developments of the economy and conveys these improvements to the rating agencies through rating advisors, to push the rating up, he said.

The committee is charged with devising a strategy of taking the Sri Lanka current speculative B+ (Fitch) and B (S&P) rating to an investment grade 'BBB-' or higher over the next four years.

A senior official of the Central Bank said that Capital Intelligence (CI), the international credit rating agency, announced that it has raised Sri Lanka's long-term foreign currency rating to 'B+' from 'B' and its long-term local currency rating to 'BB-'from 'B+'.

At the same time the rating agency has affirmed the sovereign's short-term foreign and local currency ratings of 'B'. The outlook is 'Stable' . The upgrade in the sovereign's ratings reflects the marked improvement in the political and security situation following the end of the civil war, a strong recovery in international reserves to record high levels, and better prospects for fundamental tax reform and fiscal consolidation over the medium term.

The ratings take into account CI's expectation that the government will move forward on promised tax reforms and reduce the large budget deficit and high public debt ratio in line with its medium-term plans, while at the same time taking steps to strengthen export performance and attract foreign direct investments, he said. Sri Lanka's sovereign ratings are foremost constrained by chronic fiscal problems including high indebtedness, weak revenue-generating capacity and a rigid expenditure structure.

Fiscal performance has improved in 2010, however, and the budget deficit should decline to about 8% of GDP from 9.9% in 2009.

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Sri Lanka Sovereign Strategy Brings Results, Says Central Bank

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

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

15th September 2010, www.dailynews.lk

Standard & Poor’s Ratings Services raised its long-term foreign currency sovereign credit rating on Sri Lanka to ‘B+’ from ‘B’, and the long-term local currency rating to ‘BB-’ from ‘B+’.

At the same time, Standard & Poor’s affirmed the ‘B’ short-term rating on the sovereign. The outlook on the ratings is stable.

Standard & Poor’s raised all the issue ratings on Sri Lanka’s senior unsecured debt accordingly.

Standard & Poor’s affirmed its transfer and convertibility assessment of ‘B+’, and its recovery rating of ‘4’ on Sri Lanka’s senior unsecured foreign currency debt, which signals the expectation of an average recovery of 30 percent - 50 percent in the event of a distressed debt exchange or payment default.

“The rating upgrade takes into account the continued strengthening of Sri Lanka’s balance-of-payments position, and reflects Standard & Poor’s expectation that the Government’s planned revenue reforms will improve public finances, such that fiscal deficits and public debt will decline again in a sustainable manner,” Standard & Poor’s credit analyst Agost Benard said.

These positive factors are balanced against ongoing risk posed by excessive public and external leverage, and the risk of a rebound in inflation.

The stable rating outlook reflects our expectation of swift progress in addressing structural fiscal weaknesses mostly on the revenue side and the strong growth prospects.

“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 vulnerabilities posed by the high debt and interest burdens, and still-narrow economic profile,” Benard said. Standard & Poor’s may lower the rating in the event of substantial deviation from the IMF program, or if expectations on recovery in Sri Lanka’s growth prospects and revenue improvements disappoint, he added.

Speaking to Daily News Business Central Bank Governor Ajith Nivard Cabral said this rating upgrade has been a predictable reaction to the constantly improving macro economic fundamentals of our country.

“We are pleased that S and P have done this upgrade although it would not have come as a surprise to the many investors and stakeholders. We are quite sure that Sri Lanka’s rating will continue to improve in time to come,” the Governor said.

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

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 Offers US$100mn Bonds with LIBOR + Premium as Fitch and Standard & Poor's Raised Sri Lanka's Rating Outlook

15th March 2010, www.lankabusinessonline.com

Sri Lanka is offering 100 million US dollars in two and three year floating rates bonds, paying interest every six months mainly targeting the domestic market with bids closing on March 18, the government's debt office said.

The government's debt office, which is a unit of the Central Bank, said it is offering 50 million US dollars each in 2 year and 3-year bonds which will pay a coupon based on the 6-month London interbank offered rate (LIBOR) plus a risk premium.

The bonds are tax-free and can be bought by foreign investors and local firms that can have foreign currency assets with approval from the state investment promotion agency.

Bids opened on March 12, the debt office said.

In 2010 Sri Lanka is also hoping to go for a longer tenor 500 million US dollar sovereign bond.

The bonds have been popular among Sri Lanka's banks and other investors.

Sri Lanka last sold 2-year bonds in August 2009 at 4.50 percent above LIBOR. The last 3-year sale was 4.25 percent above LIBOR in September 2009.

But analysts expect risk premiums to come down sharply this year.

In October 2009 both Fitch and Standard & Poor's raised Sri Lanka's rating outlook.

Sri Lanka is rated 'B+' with 'stable' outlook by Fitch and 'B' with a 'positive' outlook by Standard & Poor's.