Sri Lanka guarantees, SOE debt, could ‘significantly worsen’ govt finances: Moody’s

ECONOMYNEXT – Sri Lanka’s central government balance sheet could significantly worsen if it is called upon to repay contingent liabilities and state owned enterprise debt, Moody’s a rating agency said.

Moodu’s has rated Sri Lanka ‘B1’ with a stable outlook.

Sri Lanka had a central government debt of 76 percent of gross domestic product compared to an average of 48 percent for other ‘B’ rated countries.

Sri Lanka finance minister Ravi Karunanayake had said in January 2015 that contingent liabilities could be 1.4 trillion rupees (10 billion US dollars of 13.8 percent of GD)) Moody’s said.

Later a figure of 1.1 trillion rupees was mentioned.

Sri Lanka has Treasury guarantees of over 4 percent of GDP. Some of the guarantees such as those related to the Road Development Agency, which has little revenues of its own, have to be met by the government while loss making SOE’s also ultimately bailed out by the people.

"Some of the SOEs, including SriLankan Airlines (unrated), have been running operating losses for several years, the rating agency said.

"Crystallization of a portion of SOE-related contingent liabilities could significantly worsen the government’s fiscal metrics."

Interest payments consumed nearly a third of government revenues – much higher than rating peers, the Moody’s said.

Only Pakistan had similar costs.

More than 40 percent of government debt is denominated in foreign currency.

"This exposes the government to a larger repayment burden in the event of a depreciation in the local currency, as happened in late 2015," Moody’s said.

"Reliance on bilateral and multilateral lenders reduces but doesn’t eliminate vulnerability to international market volatility, as financing strains posed by falls in capital inflows in recent
months have shown."

Sri Lanka was expected to come to a deal with the IMF to raise taxes and fix state finances, this week, but no progress has been announced.