Sri Lanka dismisses sovereign rating downgrade
Mar 01, 2016 06:28 AM GMT+0530 | 4 Comment(s)
ECONOMYNEXT - Sri Lanka's Finance Minister and Central Bank Governor has dismissed a rating and outlook downgrade by Fitch deeper into junk status, saying it was an isolated action by one agency and markets had already factored in the bad news.
Fitch Ratings Tuesday downgraded Sri Lanka's credit from BB-, three levels below investment grade to 'B+' or four levels inside 'junk bond' status. The outlook was also downgraded to 'negative' at the lower level.
"That’s only one institution," Finance Minister Ravi Karunanayake told reporters in Colombo.
"These are only perceptions of certain institutions."
Central Bank Governor Arjuna Mahendran who was at a joint press conference said Moody's, a rival agency, had 'put out a positive report,' and bond yields had gone down 50 basis points recently.
Moody's already has a 'B1/stable' rating on Sri Lanka and said on February 29 that external pressure were 'credit negative'.
Fitch said there was a weakening of policy coherence that was generating foreign reserve losses with debt repayments looming ahead.
"The market has already factored in the information – they are not adding anything we did not know," Mahendran said.
He said the downgrade would not impact ongoing talks with the International Monetary Fund to strike a deal to fix the country's balance of payments trouble.
Sri Lanka's budget deteriorated in January 2015, with a sharp spike in state salaries and subsidies and the central bank compounded the problem by cutting rates in April and started monetizing debt (printing money) to finance the deficit, generating balance of payments pressure.
Domestic analysts and economists warned that Sri Lanka was heading in to balance of payments trouble almost a year earlier, but rating agencies and the IMF was more sanguine which may have also contributed the lack of urgency to fix imbalances that were building up.
An attempted float of the currency in September failed as there was no rate hike to fix excessive central bank re-financed credit growth and debt monetization continued unabated.