Sri Lanka 10-year bond rated 'B+' by S & P

July 17, 2012 (LBO) - A sovereign bond launched by Sri Lanka Tuesday has been rated 'B+' with a stable outlook, by Standard and Poor's on post-war growth prospects and planned fiscal reforms.

However the rating was affected by weak external liquidity, increasing external debt, fundamental fiscal weaknesses, and political institutions that lack transparency and independence, the rating agency said.
The full statement is reproduced below

Sri Lanka's Benchmark-Sized Global Dollar-Denominated Bonds Maturing 2022 Assigned 'B+' Rating

SINGAPORE (Standard & Poor's) July 17, 2012--Standard & Poor's Ratings Services today assigned its 'B+' foreign currency issue rating to the proposed U.S. dollar-denominated global senior unsecured benchmark-sized bond issuance by the Democratic Socialist Republic of Sri Lanka (B+/Stable/B). The bonds mature in 2022.

The rating incorporates Sri Lanka's favorable growth prospects, which we believe are partly due to the "peace dividend"--or the positive effects of the end of the civil war in 2009. We expect investments in the economy to edge upward to 30% of GDP, boosting per capita growth to more than 6% per year in the next few years.

The Sri Lankan administration has started to implement a part of its planned fiscal reforms, helped by increased political stability. Further reforms could gradually improve the country's competitiveness as well as fiscal and debt profiles.

However, the rating is constrained by: (1) Sri Lanka's weak external liquidity; (2) moderately high and increasing external debt; (3) fundamental fiscal weaknesses and the attendant high public debt and interest burden; and (4) political institutions that, in some cases, lack transparency and independence.

Sri Lanka's external liquidity has weakened in 2011 because of the larger current account deficits, equivalent of 7% of GDP. In response, the government and the central bank have recently begun to adjust their monetary and foreign exchange rate policies to curtail the pace of credit expansion and import growth.

The stable outlook on the sovereign credit rating reflects our view that Sri Lanka's strong medium-term growth prospects of more than 6% of GDP per capita and recent measures to improve the fiscal profile are balanced against vulnerable external liquidity and high fiscal and external debt. We also expect the recently announced monetary and foreign exchange policy to keep the country's external position from deteriorating further.

We may raise the sovereign rating on evidence of Sri Lanka's progress in addressing the external weaknesses and domestic problems. Fiscal or structural economic reforms that reduce the vulnerabilities from high debt and interest burdens and the still-narrow economic profile would indicate such improvement.

Conversely, we may lower the rating if the country's external liquidity deteriorates substantially, or if Sri Lanka's growth and revenue prospects fall below our current expectations.
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July 17, 2012 (LBO) - A 10-year sovereign bond launched by Sri Lanka Tuesday in international markets has been rated (P) B1 by Moody's, a rating agency which said the country's external sector has stabilized following policy measures.



"The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs," Moody's said.
"However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.

"Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage.

"As such, Moody's assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework."

The full statement is reproduced below:

Moody's assigns a provisional rating of (P)B1 with positive outlook to Sri Lanka's proposed global bond

Singapore, July 17, 2012 -- Moody's has assigned a provisional foreign currency rating of (P)B1 with a positive outlook to the government of Sri Lanka's proposed U.S. dollar-denominated global bond.



RATINGS RATIONALE

Sri Lanka's B1 sovereign rating reflects Moody's Investors Service' methodological assessment of the country's low economic and government financial strengths, moderate institutional strength, and a moderate susceptibility to event risks.

The outlook for the sovereign rating was changed to positive in 2011, reflecting an increasingly evident peace dividend reflected in greater macroeconomic stability, as well as a policy orientation of fiscal reform and economic growth that continues to be guided by an IMF program. In addition, the monetary authorities have established a regulatory and supervisory framework supportive of financial stability.

Robust growth momentum carried into 2012 with real GDP growing by 7.9% year-on-year in the first quarter. However, pressures on the balance of payments that had built up since mid-2011 prompted macroeconomic policy tightening starting in February 2012 to temper widening trade balances and declining foreign exchange reserves.

The external payments position has stabilized, although greater exchange rate flexibility may be reflected in higher inflation in the near-term. The growth outlook has also moderated somewhat, but trend fiscal consolidation remains intact with both the budget deficit and stock of debt continuing to fall as a percentage of GDP.

The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs. However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.

Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage. As such, Moody's assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework.
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July 17, 2012 (LBO) - Sri Lanka has launched a 10-year sovereign bond with order books opening in Asia on an initial price guidance of 6.125 percent, sources familiar with the issue said.

Last year Sri Lanka launched a bond with a slightly higher price guidance. In the secondary market Sri Lankan bonds have been trading at a premium to issue price in recent months.
Sri Lanka is aiming to raise a billion US dollars from the bond, a part of which will be used to repay a maturing 500 million US dollar bond in October, officials said earlier.

Bank of America Merryll Lynch, Citi, Barclay and HSBC are lead managing the bond sale. State-run People's Bank is a co-lead manager.

Sri Lanka has had several investor meetings concluding with the in London Monday.

Sri Lanka has a B1 positive rating from Moody's, a B+ stable from Standard & Poor's and a BB- stable from Fitch.

Sri Lanka is going to the markets amid uncertainty in European bond markets.

Since its maiden 500 million US dollar 5-year bond in 2007, Sri Lanka has gone to the market four times, with the last two issues being 10-year billion dollar tranches.
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