Sri Lanka’s recent reforms and automatic pricing of fuel will improve state finances and debt, but political uncertainty has heightened following recent regional polls, Fitch Ratings said in a statement yesterday.
In its Asia Pacific Sovereign Credit Overview for the third quarter of 2018 Fitch said, “Sri Lanka’s rating balances an improving policy framework, which supports macroeconomic stability and rising government revenues, against a challenging external debt servicing outlook and high government debt. The rating is supported by higher per-capita income levels and stronger governance standards than the ‘B’ category median.”
Sri Lanka’s rating balances an improving policy framework, which supports macroeconomic stability and rising government revenues, against a challenging external debt servicing outlook and high government debt.
The rating is supported by higher per-capita income levels and stronger governance standards than the ‘B’ category median.
The IMF completed its fourth review under a three-year extended fund facility in place since June 2016. Progress has been made on critical fiscal reforms, including approval of an automatic fuel price mechanism effective May 2018.
The authorities have also taken steps to introduce an automatic electricity pricing mechanism and establish a committee to develop a detailed restructuring plan for Sri Lankan Airlines. Nevertheless, Sri Lanka’s government debt remains high at around 77% of GDP, far above the ‘B’ median of 66.6%.
The sovereign’s projected debt service payments are significant, at USD15 billion in 2019-2022, from a bunching of sovereign bond redemptions, while its foreign-exchange reserves stood at only USD 9.3 billion at end-June.
The scale of external refinancing over the next few years creates a potential vulnerability for the sovereign particularly as US interest rates are on the rise.
Further improvement in external finances supported by higher non-debt-creating inflows or a reduction in external sovereign refinancing risks from improved liability management.
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