Uncertainty about the direction of future policy following the recent political crisis could have a large and lasting negative impact on international investors’ confidence, undermining Sri Lanka’s ability to refinance forthcoming external debt at affordable costs, says Moody’s investor service in their 2019 Global Emerging Market Outlook report published yesterday.
Sri Lanka’s large external financing needs and substantial foreign currency government debt raise its vulnerability. External payments due over the next year are materially higher than foreign exchange reserves, reflected in our forecast of an EVI of 161% for 2019, the report further added.
The government’s gross borrowing requirement of about 16%-20% of GDP and significant foreign currency borrowing on commercial terms also make Sri Lanka sensitive to external financing conditions. Lengthening average government debt maturities mitigate this risk.
Moody’s commenting on the regions says that trade tensions are the biggest risk to Asia Pacific’s broadly stable outlook, with tightening global liquidity posing another risk.
Most economies will continue to grow at a solid, if slowing pace. However, growing trade tensions between the US and China could hurt growth and sentiment. For financial institutions, tightening dollar liquidity and rising interest rates pose some risks. Structured finance transactions will continue to perform strongly in China, but some delinquency rates may rise in India.
For corporates and infrastructure and project finance issuers, our expectations for earnings stability or growth support our stable outlook. But we expect a more challenging year for a number of sectors.
Slower global growth, rising interest rates, trade protectionism and geopolitical tensions pose challenges for emerging markets in 2019. “Our broadly stable outlook incorporates the likely resilience of most EM issuers to these challenges, thanks to a range of different buffers including strong balance sheets, domestic growth and supportive policy.”
“ Nonetheless, credit stress could emerge for issuers operating in countries with macroeconomic imbalances or rising political risk, particularly those highly reliant on international financing.”
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