Fitch Ratings has affirmed Sri Lanka’s Long-Term Foreign- and Local Currency Issuer Default Ratings (IDR) at ‘B+’ and revised the Outlook to Stable from Negative.
The Country Ceiling and issue ratings on Sri Lanka’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘B+’. The Short-Term Foreign- and Local-Currency IDRs are affirmed at ‘B’.
Sri Lanka’s ‘B+’ rating balances its weak public finances and strained external liquidity position compared with peers against the steady progress made on the country’s ongoing International Monetary Fund (IMF) supported programme, which commenced in June 2016.
The IMF programme has eased near-term pressure on the balance of payments. The rating is supported by Sri Lanka’s favourable growth performance as well as its basic human development indicators and governance standards, which are more favourable as compared with some peers.
Fitch estimates that Sri Lanka’s 2016 fiscal performance was better than in 2015, following strong revenue growth that was supported by a value-added tax (VAT) hike. This, along with lower government spending, should narrow the deficit in 2016 to around -5.6% of GDP, from -7.4% in 2015.
Fitch believes the 2016 VAT hike to 15% from 11% and other revenue reforms announced in the 2017 budget are likely to support further fiscal deficit reductions in 2017, with the agency revising down its 2017 deficit forecast to -4.7% of GDP against its earlier estimate of close to -7%. The authorities’ 2017 deficit estimate of -4.6% is below the agency’s estimate, as the authorities have higher growth assumptions. However, Fitch expects authorities to lower spending if there is a large revenue shortfall to keep the fiscal deficit under control.
Improved Policy Coherence and Credibility: Sri Lanka’s three-year extended fund facility with the IMF has improved policy coherence and credibility and has eased some near-term balance of payments pressure. Fitch expects the country’s external funding profile to benefit from support by multilateral agencies, although its external liquidity position remains weak compared with peers.
The IMF-supported programme sets ambitious fiscal targets and the authorities have made steady progress, meeting their quantitative performance targets for the first review in November 2016. Progress on some structural benchmarks has also been made, including passage of the 2017 budget in line with programme targets.
Sri Lanka’s growth performance remains favourable and Fitch estimates the country’s five-year (2012-2016) average real GDP growth at 5.3%, which is stronger than some of its ‘B’ category peers. However, Fitch has revised its 2016 growth estimate to around 4.5%, from 5.3% (forecast at the time of the last review) due to weaker-than-expected 1H16 growth caused by the May 2016 floods.
Furthermore, the Central Bank of Sri Lanka hiked-up interest rates twice in 2016 by a cumulative 100bp, slowing credit growth and private consumption, although this has also improved macro stability.
0 comments: