Standard & Poor’s Ratings (S&P) Services yesterday revised the outlook on its ‘B+’ long-term sovereign credit ratings on Sri Lanka to negative from stable, citing high government debt and weak external and fiscal performance.
The rating agency however affirmed the country’s long-term rating and the ‘B’ short-term credit rating and left its transfer and convertibility risk assessment on Sri Lanka unchanged at ‘B+’.
“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,” S&P said.
The outlook also reflects the country’s weakened public finances, S&P said.“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.”
According to S&P Sri Lanka has a high general government net debt burden of 72 percent of GDP (2015) and is among the highest in the world in terms of revenue to interest payments (39 percent in 2015).
“With GDP per capita at US$4,000 (2016), Sri Lanka’s level of prosperity is low.”The rating agency identifies “uncertain commitment and capacity to fiscal consolidation” following the August 2015 Parliamentary election and the November budget as a key credit weakness. However S&P acknowledged that all these rating constraints weigh against Sri Lanka’s robust growth prospects, which are above average for sovereigns at similar levels of development.
The rating agency expects Sri Lanka’s budget deficit widening to an estimated 11.4 percent of GDP in 2016, versus 10.2 percent in 2013-2015 as a result of the sharp rise in motor vehicles imports to the country in the last year due to tax reductions, increase in public sector salaries and lower interest rates.
The worker remittances originating mainly from Middle Eastern countries are estimated to edge down to 7.6 percent of the GDP from 7.7 percent in the three preceding year.
S&P said it was not expecting a recovery in Sri Lanka’s external side before next year.
The rating agency estimates 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) and the US$2.15 billion proceeds from bonds issued in May and October 2015.
The rating agency said arrangements with RBI, People’s Bank of China and the International Monetary Fund could ease external funding pressure on the country.
“Fundamental weaknesses remain in the government’s fiscal metrics.
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.” S&P said.
Financial institutions’ outlook lowered to negative
Standard & Poor’s Ratings Services said yesterday that it had revised its outlook on the long-term issuer credit ratings on National Development Bank PLC (NDB), National Savings Bank (NSB), People’s Leasing & Finance PLC (PLC), and DFCC Bank to negative from stable.
At the same, S&P affirmed the ratings on these Sri Lankan financial institutions and on their outstanding notes.
Their rating actions on these financial institutions reflect the potential deterioration in the operating environment for these entities and the revision in the outlook on the sovereign long-term credit rating on Sri Lanka (B+/Negative/B) to negative from stable earlier today because of rising fiscal and external imbalances in the country.
“We expect operating conditions for Sri Lankan financial institutions to deteriorate along with the sovereign’s weakening external and fiscal performance. We affirmed the ratings on these entities because we believe credit factors specific to them are broadly unchanged.
“We do not rate financial institutions in Sri Lanka above the sovereign because of the direct and indirect influence that the sovereign in distress would have on their operations, including their ability to service foreign-currency obligations. Our ratings on NDB, NSB, and PLC are the same as the sovereign credit rating on Sri Lanka.”
In S&P’s view, the sovereign credit factors are also relevant for financial institutions in Sri Lanka because: (1) these entities are subject to government policy and regulation; (2) they invest a sizable portion of their
assets in government securities or credit; (3) a high proportion of their revenue comes from domestic operations that are susceptible to deterioration in macroeconomic environment typically associated with sovereign stress; and (4) some of them rely on the government to derive foreign currency to repay or hedge their foreign currency liabilities. S&P considers it unlikely that Sri Lankan financial institutions would be immune to increasing credit pressures on the sovereign and the broader operating environment. “We reflect these risks in our view that the economic risk trend and industry risk trend for Sri Lanka’s banking sector have become negative.