Brexit could worsen Sri Lanka BoP pressure: Moodyâ€™s
ECONOMYNEXT – The United Kingdom’s vote to leave the European Union will not have a significant credit impact on Asia Pacific countries but could worsen balance of payments pressure on countries like Sri Lanka which depend on foreign funds, Moody’s Investors Service said.
Although lower GDP growth in the UK could dampen demand for products from the rest of the world, Asia Pacific’s direct trade linkages with the country are generally limited, the rating agency said.
Market volatility arising out of ‘Brexit’ would affect sovereigns dependent on external financing, Moody’s said in a report.
“ Out of those Asia Pacific countries that have large current account deficits, Mongolia (B2 negative) relies in part on private sector financing flows. Mongolia and to a lesser extent Sri Lanka (B1 negative) have significant debt repayments due in 2016,” it said.
“In the event that it led to severe and prolonged market volatility, Brexit could heighten balance of payment pressures for these sovereigns.”
In some countries like Mongolia and Sri Lanka, elevated government debt would constrain fiscal policy room to offset potentially lower growth and external flows, Moody’s also said.
In Sri Lanka, government debt increased to 76.0% of GDP in 2015, significantly higher than similarly rated sovereigns.
“Tighter financing conditions that hamper GDP growth would make the fiscal consolidation goals more challenging,” Moody’s said.
“Weakening fiscal metrics, which could lead to renewed balance of payment pressure, were one of the drivers of our change in the outlook on Sri Lanka’s B1 rating to negative from stable in June 2016.”
Sri Lanka is also dependent on portfolio inflows to refinance its external debt, albeit to a lesser extent than Mongolia, the report said.
Funding from the International Monetary Fund (IMF) under an Extended Fund Facility (EFF) and other international lenders, combined with FDI inflows, will relieve pressure on foreign exchange reserves.
“However, they will not fully cover Sri Lanka’s external financing requirements in the next few years.”
(COLOMBO, July 11, 2016)