Sri Lanka rating upgrade depends on meeting IMF conditions
ECONOMYNEXT – Potential improvements in credit profiles of sovereigns like Sri Lanka which have got International Monetary Fund loans after running into economic difficulties, depend on how much they comply with IMF conditions, Fitch Ratings said.
In the two years leading up to their IMF loans, Fitch took negative rating action on five of the eight sovereigns that entered Standby Arrangements or Extended Fund Facilities in 2016 – Iraq, Kenya, Sri Lanka, Suriname and Tunisia.
“Support from the IMF has helped to mitigate external liquidity risks and reduced the medium-term default risks in several frontier markets that entered into new programmes in 2016,” Fitch Ratings said in a statement.
“However, potential improvements in sovereign credit profiles will depend on each country’s level of compliance with IMF conditions, and implementation risks are often high.”
A lack of currency flexibility was also a factor in pushing some frontier markets into IMF agreements, the rating agency said.
“Egypt, Sri Lanka and Suriname all ran down foreign-exchange reserves at unsustainable rates trying to resist currency depreciation in a global environment of US dollar strength,” it said.
“However, they have allowed more flexibility since beginning discussions with the IMF, which has helped reduce pressure on their external balance sheets.”
IMF loans should alleviate external liquidity pressures and reduce the risk of sovereign default, particularly where IMF assistance has been supported by other multilateral assistance or has improved access to global bond markets, Fitch Ratings said.
“However, all of these countries still have either large current-account or fiscal deficits, or both. Reducing these vulnerabilities will be key to stabilising or improving their ratings.”
(COLOMBO, Jan 09, 2016)