July 11, 2016 (LBO) – Brexit could heighten balance of payment pressure over Sri Lanka in the event that there was severe and prolonged market volatility, Moody’s Investors Service said in a research report.
Releasing a report which is one of a series on the impact of Brexit on sovereigns in different regions, Moody’s said market volatility would affect sovereigns dependent on external financing.
“Sri Lanka is also dependent on portfolio inflows to refinance its external debt,” Moody’s said.
Funding from the International Monetary Fund (IMF) under an Extended Fund Facility (EFF) and other international lenders, combined with FDI inflows, will relieve pressure on foreign exchange reserves.
“However, they will not fully cover Sri Lanka’s external financing requirements in the next few years.”
Moody’s said in the region, inflation is somewhat higher in countries like Sri Lanka, highlighting possible constraints facing those countries’ central banks.
The investors service said government debt is elevated in Sri Lanka and fiscal space to buffer negative shocks is limited.
In Sri Lanka, government debt increased to 76 percent of GDP in 2015, significantly higher than similarly rated sovereigns.
Under the IMF’s EFF, the government aims to reduce the budget deficit significantly, in particular through higher revenue collection.
“Tighter financing conditions that hamper GDP growth would make the fiscal consolidation goals more challenging,” Moody’s said.
“Weakening fiscal metrics, which could lead to renewed balance of payment pressure, were one of the drivers of our change in the outlook on Sri Lanka’s B1 rating to negative from stable in June 2016.”
Investors Service further stated that they do not expect the UK’s vote to leave the European Union to have a significant credit impact on Asia Pacific sovereigns.
“However, in the months to follow, announcements related to Brexit could trigger market volatility.”