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Monday May 17th, 2021

Sri Lanka bombings to slow economic growth, raise credit risks: Fitch Ratings

ECONOMYNEXT – Suicide bombings that killed over 250 people in Sri Lanka will slow economic growth, widen the current accounts deficit and possibly make foreign borrowings more costly, Fitch Ratings warned.

“The tragic Easter bombings in Sri Lanka will result in lower economic growth this year and could increase external financing pressures,” the rating agency said in a statement.

“These pressures are mitigated by the government’s continued adherence to economic policies and targets that have enabled Sri Lanka to get its IMF programme back on track.”

Fitch Ratings said last month’s bombings, which targeted major hotels in Colombo as well as churches, will lead to a reduction in tourism receipts, which had risen steadily in recent years to 4 billion US dollars in 2018, or about 5 percent of Fitch-estimated GDP.

The Sri Lankan government had forecast a further rise in tourism earnings to 5 billion dollars this year.

In response to the bombings, it now plans to launch an extensive tourism promotion campaign, alongside efforts to support the sector with lower taxes and subsidies.

“The full impact on tourist arrivals will depend on the government’s success in restoring security and the effectiveness of the measures to support the sector, particularly once the peak season begins in November,” Fitch Ratings said.

But Fitch forecast that 2019 growth could be 1.0-1.5 percentage points lower than its 3.6 percent forecast when it last reviewed Sri Lanka’s sovereign rating in December due to reduced arrivals and spending.

“Backward linkages to the wider economy have been significant, through job creation and construction activity, and could amplify the impact,” the statement said.

“There will also be a significant impact on the current account deficit. Tourism provided nearly half of last year’s services receipts (8.4 billion dollars) and the Sri Lankan authorities estimate that the current account deficit could widen to 2.7-2.8 percent of GDP in 2019, compared with their earlier forecast of 2.3 percent.”

Fitch Ratings said March’s 2.4 billion dollar sovereign bond issue helped ease near-term fiscal and external financing constraints.

“But vulnerabilities would increase if the bombings undermine market confidence for a sustained period.”

Foreign-currency-denominated sovereign debt repayments for 2019-2022 total 16.8 billion dollars against the government’s projections of reserves of between 7.2 billion-7.5 billion dollars at end-2019, down from its earlier projection of 8.0 billion-8.2 billion dollars, Fitch Ratings said..

“These challenges increase the importance of Sri Lanka’s IMF programme in catalysing funding support and as a policy anchor.”

The IMF Executive Board completed the fifth review under the programme this week, noting that it had been successfully brought back on track after being put on hold during Sri Lanka’s political crisis last year.

Completion of the fifth review released 164 million dollars, bringing total disbursements under the programme to 1.2 billion dollars.

“Importantly, the IMF also extended the programme by a year, to June 2020, giving more time to complete economic reforms,” Fitch Ratings said.

“The adequacy of foreign exchange reserves and refinancing risks remain key for Sri Lanka’s sovereign rating, as highlighted in our rating sensitivities,”  Fitch Ratings said.

“Our downgrade to ‘B’/Stable from ‘B+’/Stable last December reflect heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation due to the political crisis. Political tensions could resurface towards the end of 2019, when presidential elections are due.”
(COLOMBO 17 May 2019)


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