Wednesday July 17, 2019

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.


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  1. Mr D March 02, 02:20 AM

    Welcome back my EN brethren, to part 2 of this comment.

    After the colossal failure by the current administration over the past year, they have decided to take the IMF bailout route. Mr Mahendran, actually lets just call him Mr Oxford from here on, just to make a point that having an elite degree does not necessarily make you the best man for the job. Mr Oxford then says that he believes Fitch did not take into account the fact that IMF discussions are underway and that will bring relief to SL. I actually think that Fitch did take it into account and still placed a negative outlook. Now to understand why.

    If you've been following the IMF reports in the recent past, then you know that they keep repeating 3 things. Those 3 things are increase short term interest rates, reduce government spending and increase taxes.

    If they take the IMF deal, yes, we get a bailout in terms of having stable reserves but at what cost? Taxes would be the first thing that gets slapped. Expect greater emphasis on income tax and corporate tax, as well as an increase in sin taxes and most likely indirect taxation such as GST, since that is SLs primary sub avenue of revenue collection.

    The share transaction levy may make a return, pressuring an already weakened stock market. Given that interest rates are going to be on an upward trend this year, an increase in corporate and income tax will not be an easy pill to swallow but it is what the IMF will push for. Meanwhile, the IMF will also push for the government to reduce their expenditure, which may be manageable if not for the small fact that they still need to pay the government sector workers.

    If they repeal this, then riots will be the least of their concerns. This is what happens when a simpleton becomes finance minister. The primary sector workers also need significant support as they were hit hard by the global commodity problems and this cannot be overlooked. Hopefully, the IMF will make the tackling of these issues its primary concern in terms of fiscal cuts. So the current outlook indicates that we, as citizens of SL, should probably reel things in a bit and be cautious with our investments this coming year, because of the sins of this administration.

    Let us be serious here. We are not ignoring the mistakes of the previous regime. They too are responsible for our situation. However, it has been a year and this government had ample opportunities to take the ball and run with it, yet chose to descend into chaos. They then turn around and point the finger at everyone but themselves in a poor showing of yahapalanaya or good governance. Take some responsibility for once. At least do your slogan justice.Once again, Fitch are vindicated in dropping our sovereign rating. I guess they realized these issues as well and the perceived impracticality of it all. Mr Oxford then says that he does not care much for what rating companies say.

    I apologise Mr Oxford but your opinion does not matter. The investors opinions do matter and they care about what the rating companies say.Moodys lost credibility when Mr Oxford revealed that Moodys issued a positive report after listening to the finance ministers comments.

    When as a rating company, you issue a report based on a charlatans viewpoint, it does not reflect well on you. To accentuate the finance ministers idiocy, he proclaims that experience taught him that economies ran the same way when there were no rating agencies.

  2. Mr D March 01, 06:38 AM

    Fitch makes the correct call and two clowns dismiss it on behalf of the country? This is a new low, if thats even possible, for you two. Our .. said that it was only one institution and that we shouldnt read too much into it, whilst Mr Oxford said that Moodys tabled a positive report.

    Well, in the first part lets go through what Fitch said and see if we should dismiss it. In the second part, we will discuss the proposed IMF bailout and some comments made by these two. Finally we are going to talk about the power of the ratings companies in the world market in the third part.

    Fitch begins by saying that SL has increasing refinancing risks, which means that they believe that SL cannot borrow more money to repay existing foreign debt, and that assessment seems accurate. Current world investment conditions indicate that investors are heading for safe havens such as the Yen and away from risky assets, as found in SL. Regardless of what the government is promising, the data reveals the truth.

    It is also no secret that our reserves are dwindling daily and the CB have no clue on how to manage it, hence Fitchs opinion that our external liquidity position is strained due to policy incoherence is correct. They then go on to talk about the significant debt maturities, where according to Fitch, we have to repay USD 4 billion this year, whereas we only have USD 6.3 billion in reserves, leaving us in a precarious position this year. With our export market and stock exchange taking a pounding due to adverse market conditions, the viewpoint looks ominous.

    They then say the lower oil prices will help keep the current account deficit manageable in the short term. Heavy emphasis on short term here. The Brent oil prices have been on an upswing since the OPEC January freeze announcement, with it being USD 36 at the time of writing this comment, up from USD 34,35 levels last week.

    Chamber of Commerce economics head, Mr Anushka Wijesinha and various other economic analysts have commented that they expect Brent prices to move upwards above USD 40 over the course of the year, which is a viewpoint that I agree with.

    Once again, Fitch has been correct with its call here. Weaker public finances was next on Fitchs agenda. Fitch mentions that SLs tax take is woefully low compared to its expenditure. Now here is where our resident person, the finance minister, comes into play. He did very little to address the finances for his exuberant fiscal proposals for both his budgets in 2015 and added too much fiscal expenditure, which he implemented in a vote pandering move. This forced Mr Oxford to adopt a loose monetary stance and print money simultaneously to accommodate the increase in liquidity required to execute the Rs 10,000 increase.

    In theory, a proper central bank shouldnt interfere to sort out fiscal blunders. So both these people are responsible for Fitchs comments on weaker public finances. Obviously these two would dismiss Fitch for bringing the truth to light, given their track records over this past year. Fitch was accurate yet again.Fitch then highlights the decline in foreign exchange reserves. They downward revised the reserve coverage of current external payments from 3.4 months to 2.9 months. Whilst it is a bit complicated to explain, think of it simply as the country's ability to repay its financial obligations to creditors. This is not a good sign for the country.

    Fitch also stated that they do not find bilateral swaps to be sustainable, such as the Reserve Bank of India swap. This is plausible, especially given how Dr Rajan, the RBI governor, is currently in the midst of a financial restructure process in India. He has given banks an ultimatum to get their books in order by March 2017 and is looking to be cautious with Indias finances in the short term. Fitch also exposes an interesting point. They point out that SL has increased its foreign currency debt issuance, currently 46 of total public debt, up from 42 in 2014. Given how violently our exchange rate depreciated from September onwards, this poses a huge problem to the government, as this worsens the debt burden on the government.

    This brings us to the IMF bailout discussion, which we will get to in the next post. Before we move on though, tell me EN community, does it look like Fitchs opinion should be dismissed?

  3. Terry March 01, 01:26 AM

    ship is sinking but still play the band. Now it has Tamil tune.

  4. sacre blieu March 01, 07:21 AM

    So what happened to the assurances, declarations and promises by the present government to make the country a better place. Now we see a whole clutch of excuses and blaming with the illicit commissions and money making contracts going on as usual.

    The muck started with the present governor who has flawed in his administration to be allowed to continue to function. There is also corruption going on at the central bank although to a lesser degree.

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