Fitch Rates Sri Lanka's Bond at 'BB-(EXP)'

Mon Jan 6, 2014 12:55am EST

HONG KONG, January 06 (Fitch) Fitch Ratings has assigned Sri Lanka's forthcoming US dollar-denominated global bonds due 2019 an expected rating of 'BB-(EXP)'. The final rating is contingent on the receipt of final documentation conforming to information already received. The expected rating is in line with Sri Lanka's Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB-' with Stable Outlook. The sovereign's Long-Term Local Currency IDR is also 'BB-' with Stable Outlook. KEY RATING DRIVERS Sri Lanka's 'BB-' IDRs reflect the following key rating drivers: - Relatively strong growth, a comparatively high level of human development and a solid payment record. - The fiscal deficit (Fitch estimates 5.8% of GDP in 2013) and government debt burden (77.2% of GDP in 2013) remain at relatively high levels, although the 2014 budget signals commitment to medium-term debt reduction and an ability to maintain a gradual fiscal consolidation trend. - The external finances form a weakness with a persistent but narrowing current account deficit and higher net external debt level (36.6% of GDP) compared with peers also rated in the 'BB' category (on average, 22.8% of GDP). RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently well balanced. The main factors that individually, or collectively, could trigger negative rating action are: - An extended period of economic overheating accompanied by a large surge in inflation. - A material deterioration in the public finances, which leads to a substantial increase in Sri Lanka's general government debt-to-GDP ratio. - An intensification in external financing risks, particularly a renewed widening in the current account deficit combined with a fall in capital inflows. The main factors that individually, or collectively, could trigger positive rating action are: - Sustained improvement in the macroeconomic outlook that is consistent with healthy economic growth coupled with moderate and stable inflation and external equilibrium. - A material improvement in Sri Lanka's public finances underpinned by a higher government revenue-to-GDP ratio and conversely a large decline in the general government debt-to-GDP ratio. - Significant improvement in the external finances, with smaller current account deficits and higher levels of non-debt capital inflows (that is, foreign direct investment). KEY ASSUMPTIONS - Sri Lanka's political landscape remains broadly stable and there is no renewal in the civil conflict that previously lasted 26 years and ended in 2009. - Concessional financing by international donors/lenders will remain a continuing feature of the government's financing programme. - No sustained rise in commodity prices, particularly in crude oil, in line with Fitch's Global Economic Outlook. Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch Ratings (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Andrew Colquhoun Senior Director +852 2263 9938 Committee Chairperson Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Central Bank of Sri Lanka has a 10% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.