April 30, 2013 / 9:01 AM / in 4 years

RPT-Fitch affirms Sri Lanka at 'BB-'; stable outlook

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April 30 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings affirmed Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-'. The Outlooks on the ratings are Stable. The agency has also affirmed the Country Ceiling at ‘BB-’ and the Short-Term Foreign-Currency IDR at ‘B’.

Key Rating Drivers

The affirmation of Sri Lanka’s sovereign ratings reflects the following factors:

- Sri Lanka’s ratings balance the strength of the country’s resilient growth performance, healthy level of human development and strong payment record against the weaknesses of its fiscal and external balance sheets and moderate domestic savings relative to investment needs.

- The Stable Outlooks acknowledge the stabilisation of the overall economy over the past year, following the introduction of a series of monetary, exchange rate and fiscal measures in early 2012, which helped to reverse the deterioration in the balance of payments that took place in 2011.

- Although the current account deficit fell short of the authorities’ original target of 3.8% of GDP, it narrowed to 6.6% in 2012 from 7.8% in 2011. Fitch projects that the current account deficit should decline further to about 5.2% in 2013 and 4.5% in 2014 due to a combination of stronger global growth and lower oil imports.

- Persistence with tighter monetary and fiscal policies should help improve Sri Lanka’s external liquidity position. Official foreign exchange reserves, excluding gold, rebounded to USD6.9bn (3.7 months of current external payments) at end-January 2013. This is up from a recent low of USD5.5bn at end-February 2012.

- Sri Lanka’s external debt refinancing schedule, however, remains quite heavy as an average of USD1.9bn per annum in sovereign debt is projected to mature from 2013 to 2015 (versus USD1.3bn in 2012). This may not only limit Sri Lanka’s ability to rebuild foreign exchange reserves to a much higher level, but it also means that the country’s external finances will remain vulnerable to any spike in global risk aversion.

- The economy has been resilient as real GDP grew 6.4% in 2012 versus 8.2% in 2011. Fitch projects real GDP growth to average 6.5%-7% in 2013 and 2014, compared with the government’s forecasts of 7.5% and 8% in 2013 and 2014 respectively. Fitch believes the government’s forecasted growth could once again lead to overheating risks. Consumer price inflation has fallen of late, rising 7.5% year-on-year in March, down from an average of 9.8% in January and February.

- Following the successful completion of an IMF stand-by arrangement in July 2012, Sri Lanka has decided not to seek an extended fund facility. A new IMF programme would have provided some comfort that Sri Lanka would stick with the reform measures implemented in early 2012. However, Fitch does not view a successor programme as essential, provided that the authorities remain vigilant and maintain appropriate policy settings to ensure overheating risks and renewed strains on the balance of payments do not re-emerge.

- Sri Lanka has continued to make limited progress on fiscal consolidation as the budget deficit fell to 6.4% of GDP in 2012 (versus 6.9% in 2011). This was, however, partially achieved through an accumulation of arrears. Sri Lanka’s general government debt-to-GDP ratio remained elevated at 79.1% in 2012, which was significantly higher than the ‘BB’ peer rating group median of 32.6%. Low fiscal revenues weigh on the credit profile. The revenue take of 13.9% of GDP in 2012 was well below the ‘BB’ range median of 26.6% and was down from 16.7% in 2008.

Rating Sensitivities

The main factors that individually, or collectively, could trigger positive rating action:

- A sustained improvement in the macroeconomic outlook that is consistent with healthy economic growth coupled with moderate and stable inflation and external equilibrium

- A significant improvement in the external finances, accompanied by smaller current account deficits and higher levels of non-debt capital inflows (i.e. foreign direct investment)

- 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

The main factors that individually, or collectively, could trigger negative rating action:

- An extended period of economic overheating accompanied by a large surge in inflation

- An intensification in external financing risks, particularly a renewed widening in the current account deficit combined with a fall in capital inflows could lead to a significant weakening in the exchange rate or downward pressure on the foreign exchange reserves

- A material deterioration in the public finances, which leads to a large increase in Sri Lanka’s general government debt-to-GDP ratio

Key Assumptions

- Fitch assumes there were will be no sustained rise in commodity prices, particularly in crude oil, in line with the agency’s Global Economic Outlook. Crude oil is forecast to average USD105 and USD100 per barrel in 2013 and 2014 respectively, compared with USD112 per barrel in 2012

- The political landscape will remain stable and there will be no renewal in the civil conflict that previously lasted 26 years and ended in 2009

- Fitch assumes that the availability of concessional financing by international donors/lenders will remain a continuing feature of the government’s financing programme

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