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Indian Central Bank Governor = Reserve Bank of India's Governor Dr. Raghuram Rajan in Pressure from Indian Government for Lending Sri Lanka's Yahapalanaya after March 2015 - Indian Sovereign Sources note that India will push government of Sri Lanka to get ETCA signed soon so that some 'Salary Money from Sri Lanka will come to Indians when they work as Engineers, Software Developers, Professionals in Sri Lanka' or pull out US $ 1.5 billion Currency Swap (Loan) they provided to Yahapalanaya amidst Sri Lanka's Yahapalanaya going down in Reserves and Credit Rating in a 'Crisis Created Economy' Amidst Yahapalanaya facing 'Threat' of Defaulting Financial Agreements for next three years from 2016-2019.
Dr. Raghuram Rajan
Sri Lanka Outlook Revised To Negative On Rising Fiscal And External Imbalances; 'B+/B' Ratings Affirmed
OVERVIEW
RATING ACTION
On March 10, 2016, Standard & Poor's Ratings Services revised the outlook on
its 'B+' long-term sovereign credit ratings on the Democratic Socialist
Republic of Sri Lanka to negative from stable. We also affirmed the long-term
rating and the 'B' short-term credit rating and left our transfer and
convertibility risk assessment on Sri Lanka unchanged at 'B+'.
RATIONALE
The negative outlook reflects rising pressure on Sri Lanka's external
liquidity resulting from a weaker trade balance and remittances, and
short-term capital outflows that have eroded its reserve buffers. The outlook
also reflects the country's weakened public finances. We expect sizable and
rising projected fiscal deficits to push borrowings higher in 2016-2019. In
our view, the authorities face significant challenges in effectively
addressing the rising imbalance due to institutional constraints and a
fragmented political landscape.
The rating constraints on Sri Lanka are the country's weak external liquidity
and a high general government net debt burden (at 72% of GDP in 2015). Sri
Lanka's general government dedicates a higher share of its revenues to
interest payments and it is among the highest in the world (39% in 2015). With
GDP per capita at US$4,000 (2016), Sri Lanka's level of prosperity is low.
Another credit weakness lies in what we consider as an uncertain commitment
and capacity to fiscal consolidation following the Aug. 17, 2015,
parliamentary elections and the 2016 budget delivered on Nov. 20, 2015.
Institutional capacity remains low by international standards and poses risks
to the effectiveness and predictability of Sri Lanka's policy choices. These
rating constraints weigh against Sri Lanka's robust growth prospects, which
are above average for sovereigns at similar levels of development.
Sri Lanka's weakening external liquidity has been driven, inter alia, by the
following trends:
We expect external liquidity (measured by gross external financing needs as a
percentage of current account receipts [CAR] plus usable reserves) will
average 122% over 2016-2019, compared with 111% in 2014-2015. We also forecast
that the country's external debt (net of official reserves and financial
sector external assets) will be about 143% of CAR this year but will rise
gradually to a little below 146% by 2019.
The risks associated with Sri Lanka's weak external settings had previously
been mitigated by growing reserve buffers that buttressed the country's
external resilience. We estimate, however, that Sri Lanka's gross
international reserves (excluding gold deposits) were US$5.5 billion as of
January 2016 (over two months coverage of current account payments), compared
with an average of US$8.2 billion in 2014 (3.5 months of current account
payments). These reserves include a fully drawn contingent currency-swap
facility of US$1.1 billion with the Reserve Bank of India (RBI; due for
repayment in March 2016) and the US$2.15 billion proceeds from bonds issued in
May and October 2015 (both maturing in 2025)
We believe the attendant risks could be mitigated by extending the maturity of
the currency-swap facility with the RBI, increasing a US$1.6 billion facility
with the People's Bank of China, and a US$400 million financing facility for
South Asian Association for Regional Cooperation member country Central Banks.
Securing external liquidity support from the IMF could also ease rising
external funding pressure. Other factors that mitigate Sri Lanka's external
risks include its low banking sector external borrowings and some exchange
rate flexibility (the rupee fell about 9% in 2015, although this has yet to
translate into higher export demand).
Fundamental weaknesses remain in the government's fiscal metrics. We project
annual growth in general government debt to average 6.2% of GDP for 2016-2019.
In view of Sri Lanka's robust nominal GDP growth, we expect net general
government debt to remain near current levels of close to 70% of GDP through
2019. Should the rupee depreciate further against the U.S. dollar, the net
debt ratio may rise further, given about 60% of government debt is denominated
in foreign currencies. In addition, we expect only slow progress in reducing
debt-servicing costs, which we project to account for more than 40% of
government revenue in 2016. This is the second-highest ratio among all 131
sovereigns that Standard & Poor's currently rates, second only to Lebanon (see
"Sovereign Risk Indicators," published Dec. 14, 2015; a free interactive
version is available at spratings.com/sri).
The gaps we observe in Sri Lanka's policymaking capacity partly reflect the
political uncertainty associated with two elections within seven months. We
believe this hinders responsiveness and predictability in policymaking and
weighs particularly on business confidence, investment plans, and overall
growth prospects. Elsewhere, we believe the Central Bank of Sri Lanka's (CBSL)
ability to sustain economic growth while attenuating economic or financial
shocks has improved somewhat. Although CBSL is not independent of other
policymaking institutions and we continue to consider monetary policy
credibility and effectiveness as a weakness, the central bank is building a
record of credibility, shown in reducing inflation through the use of
market-based instruments to conduct monetary policy.
Sri Lanka's growth outlook continues to be underpinned by government
investment (including rebuilding the war-torn northern districts), rising
tourist arrivals, and declining inflation, which we expect to remain in the
single digits.
We continue to expect Sri Lanka's growth prospects to be favorable. We believe
the country will most likely maintain growth in real per capita GDP of 5.5%
per year over 2016-2019 (equivalent to 6.2% real GDP growth). Stronger growth,
in our view, would require an improved business environment and a pick-up in
export markets.
Combining our view of Sri Lanka's state-owned enterprises and its small
financial system (banks' loans to the private sector account for only a third
of GDP), we view the government's contingent liabilities as limited.
OUTLOOK
The negative outlook indicates that we could lower our rating on Sri Lanka in
the next 12 months if we see no tangible signs of a substantial and sustained
reversal of the weakening of external and fiscal credit metrics we currently
project.
We may revise the outlook back to stable if Sri Lanka's external and fiscal
indicators improve significantly, or if we conclude that the strength of Sri
Lanka's institutions and governance practices is on a significant and
sustained improving trend.
Dr. Raghuram Rajan
Sri Lanka Outlook Revised To Negative On Rising Fiscal And External Imbalances; 'B+/B' Ratings Affirmed
- 10-Mar-2016 03:42 EST
OVERVIEW
- Sri Lanka's external and fiscal performances have underperformed our
expectations. - A high government debt and interest burden, and gaps in institutional
capacity constrain its policy options and responsiveness. - We are revising our outlook on the long-term rating on Sri Lanka to
negative from stable and affirming our 'B+' long-term and 'B' short-term
sovereign credit ratings.
RATING ACTION
On March 10, 2016, Standard & Poor's Ratings Services revised the outlook on
its 'B+' long-term sovereign credit ratings on the Democratic Socialist
Republic of Sri Lanka to negative from stable. We also affirmed the long-term
rating and the 'B' short-term credit rating and left our transfer and
convertibility risk assessment on Sri Lanka unchanged at 'B+'.
RATIONALE
The negative outlook reflects rising pressure on Sri Lanka's external
liquidity resulting from a weaker trade balance and remittances, and
short-term capital outflows that have eroded its reserve buffers. The outlook
also reflects the country's weakened public finances. We expect sizable and
rising projected fiscal deficits to push borrowings higher in 2016-2019. In
our view, the authorities face significant challenges in effectively
addressing the rising imbalance due to institutional constraints and a
fragmented political landscape.
The rating constraints on Sri Lanka are the country's weak external liquidity
and a high general government net debt burden (at 72% of GDP in 2015). Sri
Lanka's general government dedicates a higher share of its revenues to
interest payments and it is among the highest in the world (39% in 2015). With
GDP per capita at US$4,000 (2016), Sri Lanka's level of prosperity is low.
Another credit weakness lies in what we consider as an uncertain commitment
and capacity to fiscal consolidation following the Aug. 17, 2015,
parliamentary elections and the 2016 budget delivered on Nov. 20, 2015.
Institutional capacity remains low by international standards and poses risks
to the effectiveness and predictability of Sri Lanka's policy choices. These
rating constraints weigh against Sri Lanka's robust growth prospects, which
are above average for sovereigns at similar levels of development.
Sri Lanka's weakening external liquidity has been driven, inter alia, by the
following trends:
- Our expectation of the trade deficit widening to an estimated 11.4% of
GDP in 2016, versus 10.2% in 2013-2015. This development is due partly to
a sharp rise in motor vehicle imports for investment purposes and
personal use. A reduction in import-related taxes on motor vehicles in
the 2016 budget, low interest rates for leasing facilities, and increases
in public sector salaries were reasons for the higher demand. - Our projection of net current transfers--mostly workers' remittances, of
which more than half come from the Gulf states--dropping to 7.2% of GDP
in 2016 versus an average 7.7% in the three preceding years. - A pickup in short-term capital outflows.
- On the financing side, negative net portfolio inflows in 2015. We
currently do not expect a recovery before 2017.
We expect external liquidity (measured by gross external financing needs as a
percentage of current account receipts [CAR] plus usable reserves) will
average 122% over 2016-2019, compared with 111% in 2014-2015. We also forecast
that the country's external debt (net of official reserves and financial
sector external assets) will be about 143% of CAR this year but will rise
gradually to a little below 146% by 2019.
The risks associated with Sri Lanka's weak external settings had previously
been mitigated by growing reserve buffers that buttressed the country's
external resilience. We estimate, however, that Sri Lanka's gross
international reserves (excluding gold deposits) were US$5.5 billion as of
January 2016 (over two months coverage of current account payments), compared
with an average of US$8.2 billion in 2014 (3.5 months of current account
payments). These reserves include a fully drawn contingent currency-swap
facility of US$1.1 billion with the Reserve Bank of India (RBI; due for
repayment in March 2016) and the US$2.15 billion proceeds from bonds issued in
May and October 2015 (both maturing in 2025)
We believe the attendant risks could be mitigated by extending the maturity of
the currency-swap facility with the RBI, increasing a US$1.6 billion facility
with the People's Bank of China, and a US$400 million financing facility for
South Asian Association for Regional Cooperation member country Central Banks.
Securing external liquidity support from the IMF could also ease rising
external funding pressure. Other factors that mitigate Sri Lanka's external
risks include its low banking sector external borrowings and some exchange
rate flexibility (the rupee fell about 9% in 2015, although this has yet to
translate into higher export demand).
Fundamental weaknesses remain in the government's fiscal metrics. We project
annual growth in general government debt to average 6.2% of GDP for 2016-2019.
In view of Sri Lanka's robust nominal GDP growth, we expect net general
government debt to remain near current levels of close to 70% of GDP through
2019. Should the rupee depreciate further against the U.S. dollar, the net
debt ratio may rise further, given about 60% of government debt is denominated
in foreign currencies. In addition, we expect only slow progress in reducing
debt-servicing costs, which we project to account for more than 40% of
government revenue in 2016. This is the second-highest ratio among all 131
sovereigns that Standard & Poor's currently rates, second only to Lebanon (see
"Sovereign Risk Indicators," published Dec. 14, 2015; a free interactive
version is available at spratings.com/sri).
The gaps we observe in Sri Lanka's policymaking capacity partly reflect the
political uncertainty associated with two elections within seven months. We
believe this hinders responsiveness and predictability in policymaking and
weighs particularly on business confidence, investment plans, and overall
growth prospects. Elsewhere, we believe the Central Bank of Sri Lanka's (CBSL)
ability to sustain economic growth while attenuating economic or financial
shocks has improved somewhat. Although CBSL is not independent of other
policymaking institutions and we continue to consider monetary policy
credibility and effectiveness as a weakness, the central bank is building a
record of credibility, shown in reducing inflation through the use of
market-based instruments to conduct monetary policy.
Sri Lanka's growth outlook continues to be underpinned by government
investment (including rebuilding the war-torn northern districts), rising
tourist arrivals, and declining inflation, which we expect to remain in the
single digits.
We continue to expect Sri Lanka's growth prospects to be favorable. We believe
the country will most likely maintain growth in real per capita GDP of 5.5%
per year over 2016-2019 (equivalent to 6.2% real GDP growth). Stronger growth,
in our view, would require an improved business environment and a pick-up in
export markets.
Combining our view of Sri Lanka's state-owned enterprises and its small
financial system (banks' loans to the private sector account for only a third
of GDP), we view the government's contingent liabilities as limited.
OUTLOOK
The negative outlook indicates that we could lower our rating on Sri Lanka in
the next 12 months if we see no tangible signs of a substantial and sustained
reversal of the weakening of external and fiscal credit metrics we currently
project.
We may revise the outlook back to stable if Sri Lanka's external and fiscal
indicators improve significantly, or if we conclude that the strength of Sri
Lanka's institutions and governance practices is on a significant and
sustained improving trend.
