Eurozone affecting Asian ratings - S&P

11 October 2012 03:14 am - 0 - {{hitsCtrl.values.hits}}

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Deterioration of Euro-zone economies could have a negative impact on the sovereign credit ratings of countries in the Asia Pacific region, including Sri Lanka, according to a report from Standard & Poor’s (S&P) Ratings Services.

“The main threat to Asia-Pacific sovereign creditworthiness in 2012-2013 remains centered around an unexpectedly severe deterioration of the Euro-zone’s economic and financial situation. Despite the more decisive actions shown by Euro-zone policymakers, risks of instability are still substantial. Reforms that address fundamental imbalances in the currency union are still in the early stages of implementation,” the report cautioned.

“If investors perceive that European politicians are losing the willingness to persist with reforms or if major policy mistakes occur, it may send another financial and economic shock across the world,” it noted.

Further volatility in the Euro-zone is likely have more direct negative implications for Sri Lanka’s economy due to the country’s dependence on markets in the region for a large portion of its exports.

In the context of Sri Lanka’s dependence on Euro-zone markets, the report warned that Sri Lanka’s external position, in particular, a high level of public and external indebtedness and a narrow revenue base, remain as negative ratings factors.

“We may raise the rating if there is evidence of progress in addressing the external weaknesses and domestic problems, such as fiscal or structural economic reforms that reduce the vulnerabilities from high debt and interest burdens and the still-narrow economic profile. Conversely, we may lower the rating if there is substantial further deterioration of the country’s external liquidity, or if Sri Lanka’s growth and revenue prospects fall below our current expectations,” it stated.

Sri Lanka is currently rated at B+/ Stable/B by S&P, following a downgrade from ‘Positive’ to ‘Stable’ earlier in February of this year.

The report went on to forecast Sri Lanka’s real GDP growth at 6.9% by the end of this year, reaching 7.3% by 2013.

Meanwhile, inflation was forecast to reach 7.8% by the end of 2012, decreasing to 6.3% over the course of next year.

However, IMF and ADB in recent reports, downgraded Sri Lanka’s economic growth to 6.7 percent and 6.5 percent, respectively and noted that Sri Lanka may not be able to meet the budget deficit target of 6.2 percent of GDP set for 2012.

Of the 22 rated sovereigns in the AsiaPacific, Standard & Poor’s raised the credit ratings on the Philippines and South Korea during the past six months and revised the outlook on Vietnam to stable from negative. India was the only Asia-Pacific sovereign to see a negative rating action during the period; the outlook was revised to negative from stable.

However the rating agency said that it doesn’t expect the positive trend of rating changes of the past six months to continue in the coming 12-18 months

“Economic conditions in the developed world and elsewhere remain weak and uncertain. Where credit metrics are already weak in their rating categories, policy mistakes or hesitance could drag sovereign ratings down,” S&P said.

The rating agency also said that announcement of another round of unconventional monetary easing in the U.S. also brings additional risks to some Asia-Pacific economies.

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