ECONOMYNEXT – Sri Lanka has strong growth compared to similar rated peers and its credit outlook is stable despite current political uncertainty, but the country will have to watch its debt and budget deficits, Moody’s a rating agency said in a credit update.
Sri Lanka’s state credit is rated ‘B1’ below investment grade, by the rating agency.
"The rating outlook is stable, incorporating Moody’s expectation that the ongoing growth slowdown and political uncertainty around the August parliamentary elections is unlikely to lead to medium term credit deterioration," the agency said.
"The outlook could improve if Sri Lanka’s government debt and interest payment ratios were to stabilize at considerably lower than current levels.
"On the other hand, a reversal of policy efforts to maintain macro-economic balance, lower fiscal deficits and improve the investment climate would likely lead to downward pressure on the rating outlook."
Although growth has slowed since an initial surge after the end of a civil war in 2009, numbers were still high compared to others and there was strong inflows of foreign direct and portfolio investments.
"However, Sri Lanka’s sovereign credit profile faces challenges posed by Sri Lanka’s government debt ratios, which, even though they have declined over the last decade, remain higher than the median for similarly rated peers," the rating agency said.
"Consequently, interest payments consume almost a third of government revenues, and limit the fiscal flexibility to increase spending on infrastructure or to introduce fiscal measures to offset a slowdown in growth."
Portfolio flows have slowed or turned negative in 2015, data show. An interim budget in January has ratcheted up spending.
Moody’s said as a relatively small economy with a current account deficits Sri Lanka was exposed to uncertain global growth and financial condition in the coming months, though risk were mitigated by lower oil prices.
Moody’s claimed that lower oil prices have also helped keep inflation down, though analysts say it was also due to slow domestic credit, which has since reversed mostly due to uncontrolled state driven consumption spending and interest rates incompatible with credit demand.
Other analysts have warned of accumulating macro-economic imbalances.
Interest rates have been suppressed by releasing around 2.5 billion dollars, worth excess liquidity and fresh central bank credit of around 400 million dollars have been injected over the last two months, analysts warn in a further deterioration of the external side.