Sri Lanka’s sovereign rating remains unchanged as Fitch Ratings yesterday affirmed Sri Lanka at ‘BB-’ with a stable outlook.
The rating agency said Sri Lanka enjoyed a smooth political transition following the presidential elections in January 2015, reinforcing perceptions of a functioning democracy with relatively strong institutions by ‘BB’ standards.
“However, uncertainties remain about the timing and outcome of parliamentary elections and the implications for effective policymaking in the future.”
Fitch said despite the country continues to post strong economic growth far exceeding the ‘BB’ median of 3.9 percent, the growth is heavily dependent on external borrowings.
It noted that the government’s pro-growth bias has constrained improvements in the fiscal and current account deficits.
“Recent monetary easing and continued strong credit growth lend further support to this view.”
Despite falling oil prices, remittances and tourism earnings will help the current account deficit, Fitch noted that heavy external debt repayments are raising concerns about the country’s external liquidity, particularly in the face of expected monetary tightening by the US Fed.
Sri Lanka’s international reserves have falling from US $ 10 billion at end-April 2014 to less than US $ 7 billion at end-March 2015.
However, Fitch expects Sri Lanka to succeed in rebuilding the reserves to US $ 10 billion by end-2015 through a combination of renewed borrowing on international capital markets, the exercise of foreign currency swaps with the Indian and Chinese central banks and onshore borrowing through Sri Lanka Development Bonds.
“Nonetheless, there are risks that may derail this strategy, including a potential rise in domestic political uncertainty and an adverse shift in investor sentiment, which led Sri Lanka to abort plans to borrow in international capital markets in 1Q15,” Fitch said.