By Shabiya Ali Ahlam
Fitch Ratings yesterday said it will be closely monitoring Sri Lanka’s progress on the recently secured International Monetary Fund (IMF) programme as it will be the “key” element to the nation’s sovereign rating going forward.
“The way we will be looking at the sovereign this time would be as to how the economy adjusts under the IMF programme. Most of the time any adjustment would be challenging, so will be the appraising these targets,” told Fitch Ratings Associate Director Sovereign Ratings Sagarika Chandra to journalists in Colombo yesterday.
Expressing confidence in the IMF programme’s ability to boost investor confidence to a “certain degree”, she added that through the period of adjustment, the nation is likely to witness growth, despite challenges faced.
Sri Lanka currently has a sovereign rating of B+, outlook negative. The rating was downgraded by the agency in February due to severe stress observed on the fiscal and external fronts.
Chandra, acknowledging the government’s drive to increase reserves and taxes, said the question is now largely about how the economy would grow along with that. In addition to the progress on IMF, it was stressed that from a rating standpoint key drivers include a certain degree of predictability on policies.
“In the past, we have seen the policy predictability been weakened. But I think with the programme it should give some anchor. We will be watching that quite closely,” asserted the visiting Fitch official.
Pointing out the sovereign has some “near-term” external financing needs, it was stressed that Sri Lanka’s liquidity position and buffer remains weak. Fitch said it would observe how the sovereign would be able to fund this near-term external financing gap.
From a medium-term perspective, Sri Lanka was noted to have growth potential, as it scores higher compared to its regional peers in key rated categories such as education, literacy, and ease of doing business.
“There is potential for the economy to attract more fund-directed investment in that sense. There is a medium-term potential that is positive for Sri Lanka, but to achieve that we believe the economy must go through a period of adjustment and must stick to the IMF program criteria,” Chandra elaborated.
Although the next round of rating is to take place around February 2017, Fitch stated it would carry out the exercise earlier if drastic changes are observed in the latter part of this year.
Along with the stance on IMF, Fitch said it will also be looking at the credible fiscal consolidation path, which if met would be positive for the rating. However, it was emphasised that further fiscal slippage would dampen the rating.
Domestic policy issues cloud FDI outlook
While the government has been quick to attribute low Foreign Direct Investment (FDI) to the dampened status of the global economy, Fitch Ratings yesterday asserted the issue is internal.
Having highlighted the FDI outlook for the nation remaining grim, the agency stressed it is more of a policy issue and the global slowdown is “not” a key driver.
“We haven’t seen Sri Lanka get a lot of FDIs even in the past. This has more to do with issues in the economy and unpredictability of policy. That probably, in our view is why Sri Lanka is unable to attract the FDI it wants despite performing better than its regional peers in some key matrix,”Fitch Ratings pointed out.(SAA)