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Sri Lanka seen facing risks from global interest rate hike

Oct 11, 2017 18:57 PM GMT+0530 | 1 Comment(s)

  

ECONOMYNEXT - Sri Lanka has the fourth highest external vulnerability risk to a rise in global interest rate among that could cause capital outflows or lower inflows, according to a new report on frontier markets by Moody’s Investors Service.

The credit rating agency said debt levels of frontier market sovereigns will remain elevated and they will continue to spend more on debt service costs in the next year.

The most vulnerable sovereigns are those with larger external vulnerabilities, limited domestic fiscal policy space, high gross borrowing needs and low institutional strength.

Although Sri Lanka is among the less vulnerable countries in an interest rate vulnerability ‘heat map’ done by Moody’s, it faces certain high risks.

“Frontier markets (FMs) will show differentiated credit exposure to rising interest rates globally, just as they demonstrated divergent shock absorption capacities during the commodity price slump of 2014-2015,” Moody's Investors Service said.

“Tighter global financial conditions could spur capital outflow or result in lower inflow to FMs, which can exacerbate difficulties in meeting current account and external debt obligations,” it said.

“External debt repayments are high relative to foreign exchange reserves for Tajikistan, Belarus and Mongolia,” according to the report which placed Sri Lanka fourth, after the three countries that were named.

The most vulnerable sovereigns are those with larger external vulnerabilities, limited domestic fiscal policy space, high gross borrowing needs and low institutional strength.

Moody’s said FMs’ market funding levels are rising with low global interest rates in recent years having permitted some to raise commercial US dollar sovereign debt, spurring an increase in leverage.

“FMs now pay more proportionally in interest payments than EMs. In 2016, the FMs’ median interest to revenue ratio was 8.9% compared with 7.7% for EMs.”

Sri Lanka had the third highest US dollar sovereign bonds outstanding as a percentage of GDP as at August 2017, after Belize and Mongolia, according to Moody’s.

“Higher global interest rates could limit market access and significantly raise debt-servicing costs for sovereigns with a material proportion of externally financed debt and large gross borrowing requirements,” it said.

Liquidity risks are most acute in Egypt, Pakistan and Mongolia with Sri Lanka placed sixth highest in government gross borrowing requirements as a percentage of GDP.

Moody’s said that institutions and financial buffers determine shock absorption capacity.

Vulnerability to rising global interest rates is highest in Mongolia, Mozambique, Egypt and Belize. These sovereigns also have limited available fiscal and monetary space.

And buffers vary across FMs, with some having fiscal space available, except in Sri Lanka, St. Vincent and the Grenadines, Ghana, Pakistan and Albania, Moody’s said.
(COLOMBO, October 11, 2017)
 


 

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1 Comments

  1. Tilak October 12, 09:28 AM

    Current data indicates US economy the world's no1 is gradually reaching full employment levels whilst accelerating wage growth. Recent Fed minutes indicate that further interest rate increases leading to normalisation could come as soon as December this year. No need to mention that trillions of USD parked accross the globe can respond to rate hikes accross the globe governments will attempt to find out the most important projects that are to be funded with expensive future foreign borrowings. Within the context of higher interest rates some earlier assessed low yielding marginal projects accross the globe can become muck except those high yielders.

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