Rising foreign deposits, debt add to Sri Lanka external weakness: Moody’s
ECONOMYNEXT – Sri Lanka rising non-resident deposits and foreign debt has increased Sri Lanka’s external vulnerability to above similar countries in the ‘B1’ speculative grade, Moody’s Investors Service, a rating agency has said.
Moody’s estimated Sri Lanka’s external debt burden to have risen to 57 percent of gross domestic product in 2015 from 49 percent in 2010, when credit conditions were more favourable, and was now left with high debt repayments.
"However, global financing conditions have tightened, with higher risk aversion diminishing capital flows to emerging markets," Moody’s said.
"In Sri Lanka, the decline of capital flows has resulted in higher recourse to short-term external financing and a sizable decline in foreign exchange reserves."
A September 2015 Sri Lanka tried to float the currency but the exercise failed debt monetizing continued to inject excess demand in to the banking system, firing domestic credit.
Resumed currency defence has since continued to erode foreign reserves, depleting about a billion dollars of reserves collected in November.
Total non-resident deposits over one year, short term external debt and maturing long-term external debt as a share of foreign exchange reserve were now close to 160 percent, Moody’s said.
"Together with a rise in short-term debt, Sri Lanka’s external vulnerability indicator has risen and is higher than B1-rated peers," Moody’s said.
Jordan was a distant second close to 140 percent, and New Guinea around 110 percent.
Moody;s said ADB has announced a 2.0 billion dollar funding package last week, shortly after the government said it was going to the International Monetary Fund.
"The sovereign’s recourse to multilateral financing underscores its large external financing needs and the limited scope for market financing to meets those needs, revealing Sri Lanka’s credit-negative vulnerability to external event risk," Moody’s said.
"An agreement with the IMF and financing from the ADB will provide some liquidity and thereby ease
immediate financing pressures.
"At the same time, the financing will likely be at more favorable terms than market borrowing, alleviating debt servicing cost pressures to some extent."
Moody’s said over the next three years, an agreement with the IMF can lead to higher tax collections and low budget deficits which can reduce debt.
"Moreover, such an agreement will likely restore investor confidence in Sri Lanka’s policy framework, and ultimately support more stable external inflows," the rating agency said. (Colombo/Feb29/2016)