- Says power struggle could undermine foreign investor sentiment increasing external financing challenges
- SL’ external debt stock equivalent to around 60% of GDP, and of which almost 30% or US $ 15bn due to mature between 2019 and 2022
- Fitch maintains a ‘B+’ rating on Sri Lanka with a ‘Stable’ outlook affirmed in February this year
Fitch Ratings yesterday said the current political standoff triggered by the appointment of former President Mahinda Rajapaksa as the new Prime Minister has raised uncertainty over the continuation of the country’s economic reform agenda and if prolonged it could undermine investor confidence, making debt re-financing an uphill battle.
Becoming the second rating agency to issue warnings after Moody’s Investors Service on the current political upheaval, Fitch Rating among other things cited major risks to fiscal consolidation, which is more likely to get derailed after the rise of Rajapaksa, a well-known populist who rode his previous stint with expanded budget deficits and heavy borrowings from China. “Prolonged political upheaval accompanied by the deterioration of policy continuity could undermine investor confidence and make it more challenging for the government to meet its large external financing needs in 2019-2022”, Fitch Rating said in a note.
The rating agency is worried that a delay to the budget or the slippage on targets under the International Monetary Fund (IMF) programme could undermine near term investor sentiment, which could further increase external financing challenges.
The rating agency said the outcome of the power struggle and possible implications for the sovereign rating of Sri Lanka still remains uncertain.
Fitch maintains a ‘B+’ rating on Sri Lanka with a ‘Stable’ outlook, which was affirmed in February.
A key reform Sri Lanka was supposed to carry out under the IMF programme was the implementation of an electricity pricing formula.
With the ruling party MP Dullas Alahapperuma yesterday announcing that the automatic fuel pricing formula currently in place will be abolished from November, it is highly unlikely that a pricing formula for electricity prices will be introduced by the new rulers.
However, any material event such as this could prompt Fitch to re-examine Sri Lanka’s rating.
“At the time, we noted that potential negative rating sensitivities included deterioration of policy coherence and credibility, a derailment of the IMF support programme or a reversal of fiscal improvements leading to a failure to stabilize government debt ratios,” Fitch said.
Sri Lanka plunged into a deep constitutional crisis last Friday, after President Maithripala Sirisena appointed Rajapaksa as the Prime Minister, sacking Ranil Wickremesinghe, ending the Sirisena-Wickremesinghe good governance regime.
However, what has prolonged the crisis is the President’s move to prorogue Parliament until November 16 amid Wickremesinghe calling to re-summon the assembly to show his majority support.
Wickremesinghe is still hanging on to his post claiming that he still is the legitimate Prime Minister of the country and his party calls the new Cabinet illegal and vows to take legal action against the officials who supports the new government.
However, even if Wickremesinghe manages to hang on to power, things would not change much in the fiscal front as he would also be tempted to adopt a more populist fiscal stance, given the political pressure he had faced since the ruling coalition suffered heavy losses in the local government elections, Fitch opined.
Anyhow, Rajapaksa has now assumed duties as the Prime Minister and has undertaken the most crucial portfolio of finance and economic affairs while a section of the Cabinet has also been appointed.
Rajapaksa as the Finance Minister will have to deal with some crucial challenges such as the weakening rupee and the massive debt repayment.
Sri Lanka’s external debt stock is equivalent to around 60 percent of the gross domestic product and almost 30 percent or US $ 15 billion, which is due to mature between 2019 and 2022, Fitch Ratings said.
Almost half of the public debt is denominated in foreign currency and Fitch said pressure could be created if the rupee continued to weaken, which has lost over 12 percent against the dollar so far this year.
Meanwhile, Fitch doesn’t see any risk to the Central Bank’s autonomy from the current political upheaval.
However, stakes remain high that a Rajapaksa loyalist could land the job as the economic policies of the government now led by Sirisena and Rajapaksa is very much on a collision course with the policies of incumbent Central Bank Governor Indrajit Coomaraswamy.
ICCSL says current political crisis can have adverse economic consequences
The International Chamber of Commerce Sri Lanka (ICCSL) in a statement yesterday said it was very concerned about the current political crisis in the country.
“The current political crisis can result in adverse economic consequences, if it remains unresolved in the next few days.
We request key political authorities to resolve the current political crisis through the democratically established and tested institutions as early as possible, and in the best interest of the country,” the ICCSL statement said.
ICCSL is the domestic chapter of the International Chamber of Commerce Paris, the largest business organization in the world. Its 6 million members in over 100 countries have interests in every sector of private enterprise.
