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

Mon Apr 7, 2014 3:52am EDT

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April 7 (Reuters) - (The following statement was released by the rating agency)

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 current 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 basic human development (as indicated by the UN's Human Development Index) and a solid payment record.

- The fiscal deficit (5.9% of GDP in 2013) and government debt burden (78.3% 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 (35.9% of GDP) compared with peers also rated in the 'BB' category (on average, 18.9% of GDP).

RATING SENSITIVITIES

A Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are 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.

- 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 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.

- No sustained rise in commodity prices, particularly in crude oil, in line with Fitch's Global Economic Outlook.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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