International rating agencies lower Sri Lanka’s credit outlook

Apr. 27 (LBO) – International rating agencies Fitch and Standard & Poor’s Thursday cut Sri Lanka’s credit outlook to negative from stable, reflecting the island’s worsening security situation. Should the violence become more widespread, adversely affecting the economy, public finances and donor inflows, Sri Lanka’s sovereign ratings could be downgraded, both agencies said.

– Mel Gunasekera “The Negative Outlook reflects a further deterioration in the security situation in recent days, which has provoked official retaliation for the first time since a ceasefire agreement was put in place in 2002,” says Paul Rawkins, Senior Director in Fitch’s sovereign team.

Both agencies said there was no change in the country’s credit rating, which currently stands at ‘junk’ or ‘below investment grade’. Fitch assigned a ‘BB-‘, while S&P gave it a ‘B+’.

Credit ratings are used by fund managers to determine investment risk and the amount of interest payments they demand.

Investment promotions minister Rohitha Bogollagama scotched the negative outlook. “Sri Lanka is resilient; we are back to business whatever happens.”

Deva Rodrigo, who heads the top business grouping, the Ceylon Chamber of Commerce said both agencies have had a knee jerk reaction to violence that has taken place in one section of the country.

“I believe they will upgrade us quickly, and restore Sri Lanka to a better credit rating than what we have now,” he told reporters.

However, Rawkins said the turn of events “risks elevating hostilities to new heights while stretching the credibility of the ceasefire agreement to its limits.” He was referring to a spate of bombings by the Tamil Tiger rebels and retaliatory attacks by the government following a suicide bomb, targeting army chief Sarath Fonseka Tuesday.

At least 85 people have died in bombings in the past two weeks while Tamil rebels say 70 civilians have been killed by pro-government militia or security forces, a charge denied by the military.

“A resumption of full scale hostilities could have negative implications for the country’s already stressed fiscal and debt position, and likely impair its previously adequate level of external balances,” S&Ps credit analyst Agost Benard said.

Top peace envoy Erik Solheim said Wednesday he did not believe the latest violence signified the end of a ceasefire in place since February 2002.

Bond costs

A negative credit outlook would also increase Sri Lanka’s cost of raising funds in the international markets.

“Investors may want a premium on bonds, which may push the cost of borrowing up. But a downgrade will have an immediate impact on the cost of debt,” explains Channa Amaratunga, Economist at Boston Asset Management.

Sri Lanka plans to sell up to a billion dollars in bonds maturing in 7-10 years later this year, treasury secretary P B Jayasundara said. The government has already hired Citibank Sri Lanka, a unit of Citigroup Inc., to structure the issue.

“We are currently looking at various options, to raise funds at the cheapest possible way,” Jayasundara told reporters Wednesday adding that the government hopes to use part of the proceeds to retire some expensive 400 million dollar loans borrowed by Japan in the early 1980s.

Peace ‘n Politics

Lasting peace and political stability will continue to play an anchor role in Sri Lanka’s credit worthiness, both agencies said.

The government and the Liberation Tigers of Tamil Eelam continue to profess confidence in the resumption of Norwegian-brokered peace talks.