Sri Lanka’s first sovereign rates of BB- and B+ from Fitch Ratings and Standard & Poor's Ratings(S&P) Services were announced yesterday just before the budget 2006 presentation with its proposals to issue foreign currency bonds.
Fitch ratings gave long-term foreign and local currency ratings of 'BB-' (BB minus), while assigning the country a Short-term foreign currency rating of 'B'.
According to Dow Jones reports this rating is shared by countries such as Vietnam, Indonesia, Turkey, and Brazil. Meanwhile, S&P rated Sri Lanka one notch lower, at B+, while it also gave Sri Lanka's short-term foreign-currency B, and long-term local-currency BB-.
Treasury Secretary Dr. P.B. Jayasundara noted that the ratings were “quite encouraging” and welcomed the fresh perspective from “transparent , market oriented rating agencies,” in addition to the donor community view on Sri Lanka’s creditworthiness.
Economic Advisor to the President and the Secretary of the Ministry of Plan Implementation Ajith Cabral noted that while steps were on the way to improve Sri Lanka’s ratings, the current ones was a positive start.
However, Asian Development Bank Country Director Alessandro Pio noted that while the ratings provide Sri Lanka an opportunity to tap into diverse international finance sources, borrowings need to be done cautiously, to ensure that debt servicing will not become a burden.
“Sri Lanka has proved resilient to adverse shocks over a long period of time, its institutions are strong and it has an unblemished debt service record," Fitch Sovereign team Senior Director Paul Rawkins said yesterday. "However, weighing in the balance are concerns about public debt sustainability, weak coalition governments that have impeded fiscal consolidation and the absence of an enduring solution to a long-running civil conflict,” he added.
"Peace and politics hold the key to Sri Lanka's future," Mr. Rawkins said. "The ceasefire agreement has produced tangible benefits in the shape of an improved economic and business climate, but the absence of an enduring peace continues to hang over the country, intruding into the everyday business of government and the longer-term commitment to economic reform." He added that a fresh outbreak of full-scale hostilities would be very damaging for the rating, not least because the public finances are so much weaker than they were and external financial assistance could be put at risk if donors lost confidence in the peace process.
According to Fitch the main constraints on the rating are the fragile security situation and weak public finances. Fitch acknowledges the recent deterioration in the security situation, immediately after the presidential election causing some turbulence in local financial markets. Nonetheless, Sri Lanka's BB- rating incorporates a potentially volatile security situation and Fitch still expects the 2002 ceasefire agreement to hold, especially given the increased focus of the international community on the peace process. If the violence to become more widespread, however, Fitch warns that the adverse impact on the economic and business environment would bring downward pressure on Sri Lanka's ratings.
With respect to public finances, Fitch expects a gradual reduction in the public debt burden over the medium-term reflecting the low effective interest rate on government debt and relatively strong economic growth. However, given current debt levels, there is little room for maneuver for an easing official policy. Conversely, faster than expected progress in terms of fiscal consolidation and in securing a final peace settlement would support an improvement in Sri Lanka's creditworthiness and ratings.
"A key support for the rating is Sri Lanka's impeccable sovereign debt service record, an attribute which is rare among sub-investment grade countries," Mr. Rawkins said. This record owes much to the favourable structure of Sri Lanka's external debt, most of which has been extended on highly concessional terms.