Tuesday, July 18, 2017

Fitch revises Outlook on Sri Lanka to stable

Fitch Ratings has taken rating actions across the Asia in February, and the Outlooks on Sri Lanka (B+) and Vietnam (BB−) were revised to stable from Negative in February and June, respectively.

While it is difficult to generalize across such a diverse set of economies, a common theme is that real GDP growth has mostly remained strong across Asia frontier sovereigns.

At the top of the pack is Bangladesh, which recorded 7.1% growth in 2016, facilitated by wage increases and accommodative monetary policy that offset headwinds from infrastructure bottlenecks and security concerns.

Vietnam has also been a strong performer, with growth of 6.2% in 2016, led by manufacturing and services, accompanied by continued FDI inflows and a policy focus on macro stability.

At the other end of the growth spectrum, Mongolia slowed sharply in 2016 to 1.1% due to weaker commodity prices and a halt in FDI on the back of a major mining project delay.

Weak public finances weigh on most Asia frontier sovereigns, with the exception of Bangladesh. Mongolia’s fiscal deficit was near 17% of GDP due to large pre-election spending and lower commodity prices. The deficit, alongside substantial currency depreciation, pushed up government debt to 92% of GDP.

High government debt and a narrow revenue base also weigh on Sri Lanka’s finances. IMF supported programmes in Sri Lanka and, more recently Mongolia, have lifted market sentiment and stabilised credit profiles.

The programmes should facilitate sound polices and fiscal sustainability.

Structural Challenges Structural factors are also among the key rating constraints for Asia frontier sovereigns. Per capita incomes remain lower than in other regions, with only the Maldives surpassing USD 4,000.

A reliance on a narrow economic base can also render some countries more vulnerable to external shocks and pose a constraint to their rating profiles.

The Maldives relies heavily on the tourism sector, which represents 84% of current external receipts.

Ultimately, rating trajectories for frontier Asia will depend on the ability of policy-makers to sustain their emerging track records of macroeconomic stability and implement structural reforms to enhance medium term growth prospects. In countries with IMF-supported programmes, successful implementation of policies to achieve fiscal consolidation will be key.

Credit developments in frontier markets can change quickly, as evident from growing external pressures in Pakistan.

Author:

0 comments: