Fitch cautions over volatile external front

24 June 2015 03:00 am - 0 - {{hitsCtrl.values.hits}}

A A A

By Chandeepa Wettasinghe
International ratings agency Fitch Ratings warned Sri Lanka against ludicrous policies, persistent uncertainties in the political frontier and weakening foreign reserves while reaffirming the sovereign at ‘BB-’/Stable for the second quarter of 2015.

“A further increase in external vulnerability because of sharp decline in foreign reserves, (and) a deterioration in policy coherence and credibility (will be) leading to a widening of macroeconomic imbalances and a loss of investor confidence,” the report said.

Investor confidence is crucial, as the new regime is planning to drive the economic growth through foreign direct investments instead of through debt instruments.

The report further added that the interim budget did little to rectify the major weaknesses in the fiscal policy, as most of the revenue measures were one-off in nature.

However, it failed to mention that none of the revenue measures in the interim budget were passed as laws in Parliament, despite the approval of the expenditure.

This will be placing a strain on revised government projections of 4.4 percent fiscal deficit in the interim budget as opposed to the original 4.6 percent deficit.
Economists across the country from state universities, as well as think tanks such as the Pathfinder Foundation too, have criticized both the past budgets as well as the interim budget for being economically unsound.

The report also noted that while the transition of power during the Presidential elections was smooth, the uncertainty of Parliamentary elections has weakened investor confidence, which is partly reflected in the current performance of Colombo Stock Exchange.

Fitch added that investor confidence will seriously affect the foreign reserves.

“Sri Lanka’s foreign-reserve coverage of its current external payments remains narrow, and is vulnerable to shifts in
investor sentiment.

That is especially true because foreign holdings of Sri Lankan government securities are high and as domestic political uncertainty currently prevails.”

The rating agency said that while lower oil prices, steady remittances and tourism receipts will support the current account, the recent wage increase and policy rate cuts will lead to higher imports, translating to risks to the current account.

The report said that increased foreign direct investments, improvement in foreign reserves and credible medium term fiscal consolidation which will lead to improved government revenue and GDP are positives Sri Lanka should strive to achieve.

While Sri Lanka has achieved a 7.5 percent 5-year average growth compared to 4.5 percent across similarly rated countries, Fitch noted Sri Lanka’s position in GDP per capita, government debt to GDP and net external debt to GDP are far worse in comparison.

Finance Minister sees sharp rise in rupee in two weeks

REUTERS: Finance Minister Ravi Karunanayake yesterday said that the rupee was set to climb to a two-year high of 130 per dollar from current levels due to ample dollar inflows.

“Today, the dollar is at Rs.133.90. We will bring this to Rs.130 within the next two weeks. There are ample dollars coming into the country,” Karunanayake told Parliament in response to a question raised by the opposition.

The opposition has criticised Karunanayake for mismanaging the economy since he came to power after a January 8 election.

Currency dealers said the government may have knowledge about dollar inflows but said it was unlikely the rupee would appreciate so much within such a short period of time.

If the rupee climbs to 130 per dollar, it would have appreciated 3 percent to a two-year high.

“It is possible if there are inflows and if those inflows go through the market. He (finance minister) may have information what we don’t have. So he may be aware of the inflows,” said a currency dealer asking not to be named.

The rupee’s value is largely decided by the Central Bank as it can direct state banks to buy or sell dollars.

However, another dealer said allowing a 3 percent appreciation is not possible over such a short period.

“I am not sure if the finance minister is being practical. I do not see rupee appreciation given a strengthening dollar, heavy demand for dollars and rising demand for imports.”

The rupee traded steady at 133.90 to the dollar yesterday after hitting a record low of 134.20 last Thursday.

Rupee ends steady; forwards edge up
Spot rupee ended steady yesterday as a state bank continued to offer dollars at Rs.133.90, while three-month forwards edged up after the Finance Minister said the currency would appreciate sharply in the next two weeks, dealers said.

The spot rupee ended unchanged at 133.90, while three-month forwards closed little firmer at 135.60 from Monday’s close of 135.74, dealers said.

“The government may be trying to use the $500 million foreign currency term financing facility to boost the rupee instead of raising the foreign currency reserves,” a currency dealer said on condition of anonymity.

The government has called on banks and investment houses to propose terms for a foreign currency term financing facility as it seeks to raise up to $500 million to meet the costs of some externally-funded projects stated in its 2015 budget.

The rupee has appreciated around 0.2 percent after hitting a record low of 134.20 on Thursday, with the state bank lowering its dollar selling rate.

Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

Comments - 0

Add comment
Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.

Fitch cautions over volatile external front

Comments - 0

Add comment

RECOMMENDED

‘Spike in blast fishing’ poses renewed threats to Sri Lanka’s marine ecosystems

UDA owned land in Thalawathugoda; UDA Minister Prasanna Ranatunga under the spotlight for forceful occupation of reserved land

Loss-making SMIB faces political pressure in recovering loans

Baltimore Bridge Collapse: MV Dali, SL authorities anchored in mystery?

Has Sri Lanka become a potential hub for the illegal wildlife trade?

Spotlight on Moragahakanda Development Project Moragolla villagers lose livelihoods and down to one meal a day

Ambitious Sri Lankan jobseekers ‘trafficked into Ukraine war zones’

Most Viewed in News

New Visa procedure implemented

Two racing drivers arrested over Fox Hill tragedy

Former MP Palitha Thewarapperuma dies from electrocution

Ranil Wickremesinghe caravan moves on despite barking dogs

Racing event tragedy leaves seven dead including eight-year-old child

Sri Lankan among NASA’s new crew for next simulated Mars journey

MIRROR CRICKET

Is Chamari Athapaththu Sri Lanka’s greatest cricketer ever?

Athapaththu back atop ICC Women’s ODI Batting Rankings

Chamari Athapaththu sets big goal for T20 World Cup

How does CSK get best out of Pathirana?

TODAY'S HEADLINES

No footboard riding allowed, no liability for accidents: Railways Department

Six patients claim Rs.600 million from Keheliya and others for permanent loss of sight

SLPP, UNP initiates action for forming broad alliance

Here is the way!

Pakistan lose key players for last two T20Is against New Zealand

Sri Lanka secures third spot in South Asian Kurash Championship 2024

Athapaththu back atop ICC Women’s ODI Batting Rankings

Army forms committee to probe Diyatalawa Fox Hill Supercross accident