ECONOMYNEXT – Presidential and parliamentary elections starting from the end of 2019 could threaten the ability of Sri Lanka to roll-over debt, Moody’s, a rating agency said as the country lauched a second sovereign bond.
The International Monetary Fund has resumed a program which is expected to improve budgets.
"However, political tensions could also resurface before and after the presidential elections scheduled for late 2019 and the parliamentary election in 2020," Moody’s said.
"That could undermine international investors’ confidence in Sri Lankan financial assets, and threaten the government’s ability to refinance its upcoming debt obligations."
Moody’s gave a rating of ‘B’ in line with the sovereign rating to 5 and 10 year bond program launched Monday, the second such issue in the year.
However the cabinet of ministers last week approved the borrowings of 480 billion rupees for debt management.
Officials have said Sri Lanka could go for a third bond sale of about two billion US dollars to build a war chest to repay debt coming up in 2020, when elections may create uncertainty.
Moody’s said that Sri Lanka has significant government liquidity and external vulnerability risks.
"This is balanced against moderate per capita income levels and stronger institutions relative to many similarly-rated sovereigns that support the B2 rating," Moody’s said.
It said that Sri Lanka’s foreign reverse cover is low, exposing the country to refinancing risks on sovereign debt maturities and market sentiment.
Lower tourism earnings after the Easter Sunday attacks will hit economic growth, straining the budget and external finances, Moody’s said.
Risks also arise from struggling state-owned enterprises, if they require financial support from the government, the ratings agency said.
However, the country’s growth potential, and relatively large economy compared to similarly rated peers gives it some shock absorption ability and limit some of the risks arising from high debt, Moody’s said.
Moody’s said the rating could go up if Sri Lanka sustains a build-up of non-debt creating foreign exchange, which could be generated with better policies leading to higher foreign direct investments.
The rating could go down if foreign exchange drains faster than expected, and if the government reverses recent reforms undertaken to improve the budget deficit, external risks and economic growth, Moody’s said.
This is Sri Lanka’s second international sovereign bond in 2019.
In March Sri Lanka sold one billion US dollar of 5-year bonds at 6.85 percent and 1.4 billion US dollars of 10-year bonds at 7.85 percent.
Bloomberg Newswires said initial price guidance was 6.60 percent for 5-year bonds and 7.8 percent for 10-year bonds launched on Monday.
Citi, Deutsche Bank, HSBC, J.P. Morgan, SMBC Nikko, StanChart and BOC International are managing the sale.