Sri Lanka higher spending, deficits, credit negative: Moody’s

ECONOMYNEXT – Sri Lanka’s continued high deficit target of 5.9 percent of gross domestic product with total spending set to rise to 22.3 percent of gross domestic product from a recent 18 – 19 percent, will be negative for sovereign credit, Moody’s, a rating agency said.

There higher expenditure set aside for education, health and infrastructure. In 2015 the deficit is also expected at 5.9 percent of GDP

"If implemented, such spending would enhance growth prospects but would further delay Sri Lanka’s fiscal consolidation and add to the government’s already high debt, a credit negative," Moody’s Investors’ Service said.

"Although Sri Lanka’s deficits are down from a peak of 9.9% of GDP in 2009, fiscal consolidation has stalled, with deficits exceeding original targets in 2014 and 2015,"

"There is a similar risk of the 2016 budget deficit overshooting targets if nominal GDP growth is lower than forecast or if the government does not receive the higher tax and non-tax revenues that the budget expects.

"Moreover, even if Sri Lanka meets its budget deficit target, the government’s fiscal position will remain weaker than most similarly rated sovereigns."

According to available information expenses of about 01 percent of GDP and a similar amount of revenue are imputed, analysts say.

The budget has also proposed to raise the ceiling on sovereign guarantees for road, power, water and other infrastructure projects to 10 percent from 7 percent while also giving guarantees for public private partnerships.

A proposal to limit foreign holdings of rupee denominated bonds to 10 percent of the total will have no effect since securities have already been sold down, Moody’s said.

The budget had a number of policy measures to boost private investment. Higher foreign investment would be good for the country’s credit.

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"Although these measures are unlikely to immediately produce significant revenue or growth, they signal the government’s efforts to increase domestic and foreign private investment," the rating agency said.

"If the perception of greater openness to foreign direct investment translates into actual increases in investment, it would be credit positive." (Colombo/Nov30/2015 – Update II – corrected deficit target 5.9-pct)
 

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