Sri Lanka coalition administration with SLFP credit positive: Moody’s

ECONOMYNEXT – The setting up of a coalition administration by the United National Party with main opposition Sri Lanka Freedom Party will be credit positive for Sri Lanka as it would allow policies to address fiscal problems and boost growth, Moody’s, a rating agency said.

Moody’s said with the UNP boosting its seats to 105 in the 225 parliament, a two-thirds majority could be obtained when the SLFP, the second largest party where ex-President Rajapaksa is a member, joins.

"This would address flagging business confidence and slowing foreign investment flows of the past six months," Moody’s said in a credit outlook published on August 24.

Moody’s said a minority UNP administration since January 2015 had generated a £political environment characterized by fractious rhetoric between rival political factions.

"In an environment of slowing global growth, political gridlock in the first half of this year dampened business confidence, leading to a reversal of capital flows," Moody’s said.

"If the current structure of government limits the negative effect that such political differences had on business confidence, the economic outlook will improve.

"As a small economy with a current account deficit, a continued decline in capital inflows would have hurt Sri Lanka’s balance of payments position with the potential to negatively affect domestic growth as well."

Net portfolio investment into Sri Lanka declined in the first quarter of 2015, "partly reflecting market pessimism about the direction of policymaking and its effect on Sri Lanka’s macroeconomic prospects."

Sri Lanka’s growth, was robust compared to peers but debt was high.

"Government policies are increasingly important in addressing Sri Lanka’s macroeconomic challenges, which stem from high government debt, subdued international trade, and the potential for capital outflows from emerging markets ahead of an increase in interest rates by the US Federal Reserve and China’s slowing economy."

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Sri Lanka has a high current account deficit largely due to net financial inflows.

Analysts have pointed out that every few years, the country is driven to balance of payments crises by large and continued injections of liquidity into the banking system by the Central Bank which widens the current account deficit to over and above inflows. (Colombo/Aug24/2015).

 

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