Brexit could raise fresh concerns over SL’s balance of payment: Moody’s

Close on the heels of Sri Lanka securing an International Monetary Fund (IMF) lifeline to avert a looming balance of payment (BoP) crisis, one of the top three global rating agencies yesterday warned that fresh pressures were mounting over the country’s external vulnerability in the aftermath of Britain deciding to leave the European Union (EU). According to Moody’s Investors Service, due to the investor risk aversion post-Brexit, investors could redirect their investment flows into safe haven markets from markets with higher external risks, which depend on external financing and operating with higher current account deficits.

Among Moody’s Asia Pacific sovereigns, Mongolia has a large current account deficit and to a lesser degree in Sri Lanka and they rely in part on private sector financing flows. “Consequently, any severe and prolonged market volatility could heighten balance of payment pressures for these two sovereigns,” Moody’s said yesterday in a note, which looked at the Brexit impact on Asia Pacific sovereigns.

The external vulnerability could be further heightened for Sri Lanka as significant debt repayments are due during this year. Sri Lanka’s dependency on portfolio inflows to refinance its external debt is also high, albeit lesser than in Mongolia. “Meanwhile, out of those sovereigns that are vulnerable to a shift in portfolio flows, government debt is elevated in Sri Lanka and has risen significantly in Mongolia in the last five years.

In both cases, fiscal space to buffer negative shocks is limited,” the rating agency stated. Sri Lanka’s government debt-togross domestic product (GDP) is 76 percent in 2015, significantly higher than similarly rated sovereigns.

However, it was only last week the newly appointed Central Bank Governor Dr. Indrajit Coomaraswamy downplayed any negative impact from Brexit on the Lankan economy, except in the case of the country having to raise money from international capital markets. Speaking on possible external vulnerabilities on the back of debt repayments, which are falling, he said the country faces no crisis but stressed that the external sector was “not in a good equilibrium” with record trade surpluses, continued current account deficits and lacklustre foreign direct inflows. He also saw no major difficulties in meeting the external debt obligations. Further, the limited fiscal policy room available for Sri Lanka will also constrain the ability of the country to offset these potentially lower external flows, which could result from the Brexit, Moody’s added.

The IMF’s three-year US $ 1.5 billion extended fund facility was entered into with the promise of Sri Lanka’s government following a more challenging path of fiscal consolidation but the reforms and the targets look ambitious, Moody’s said earlier. “Generally, an initial narrowing of deficits diminished or reversed after a few years and the government’s debt burden continued to rise,” they said in June. The higher inflation in Sri Lanka has also limited the scope for the Central Bank to ease the monetary policy which otherwise could have used to provide some stimulus to the slowing economy. Sri Lanka’s prices are behaving in opposite direction to many other Asia Pacific countries which enjoy a moderate level of inflation on the back of lower commodity prices.

The possible shift in portfolio flows will not just aggravate the country’s external vulnerabilities but also will limit the scope for economic growth due to limited fiscal and monetary space available for the authorities to ease off the pressures.