Standard and Poor’s has confirmed a ‘B+’ rating on Sri Lanka, keeping a ‘negative’ outlook unchanged, despite improvement is tax revenues, as policy making remained weak amid government infighting.
“The gaps we observe in Sri Lanka’s policymaking capacity partly reflect the political uncertainty associated with deeply-rooted factionalism within the government,” S & P said.
“We believe this hinders responsiveness and predictability in policymaking and weighs particularly on business confidence, investment plans, and overall growth prospects.”
The Sri Lankan government’s reform efforts and the IMF lending program have led to nascent improvements in the country’s fiscal profile.
We are therefore affirming our ‘B+/B’ sovereign credit ratings on Sri Lanka.The outlook remains negative, however, given Sri Lanka’s weak external profile, in particular, its low net reserve levels, and the vulnerability of public finances to any exchange rate shocks.
On March 7, 2017, S&P Global Ratings affirmed its ‘B+’ long-term and ‘B’ short-term sovereign credit ratings on Sri Lanka. The outlook on the long-term rating remains negative. We also left our transfer and convertibility risk assessment on Sri Lanka unchanged at ‘B+’.
Over the past year, Sri Lanka’s fiscal position has improved as a result of government-led reforms and IMF technical and funding assistance. However, high external debt, and low reserves continue to make Sri Lanka vulnerable to external shocks, in our opinion. Other rating constraints on Sri Lanka include the high general government net debt burden (at 74.9% of GDP in 2016).
Nevertheless, the average maturity of the general government debt profile at seven years is unusually long compared with other emerging market peers’, S&P said.
We expect Sri Lanka’s growth prospects to remain favorable. We believe the country will most likely maintain growth in real per capita GDP of 4.5% per year over 2017-2020 (equivalent to 5.2% real GDP growth). Stronger growth, in our view, would require improved institutional settings and a pick-up in export markets.
Combining our view of Sri Lanka’s state-owned enterprises and its small financial system (banks’ loans to the private sector account for only about a third of GDP), we view the government’s contingent liabilities as limited.
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