July 11, 2016 (LBO) – Moody’s Investors Service has assigned a provisional rating of (P)B1 to Sri Lanka’s announced US-dollar denominated bond offering. The Government of Sri Lanka’s issuer rating is B1, with a negative outlook.
Moody’s said it expects to remove the provisional status of the rating upon the closing of the proposed issuance and a review of its final terms.
Reproduced below is the ratings rational issued by Moody’s Investors Service.
Sri Lanka’s B1 rating is supported by the economy’s robust growth potential and higher income levels than similarly rated sovereigns. With the effective implementation of some of the fiscal policy measures and other structural reforms planned under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), the government would be able to tap a significant potential revenue base.
However, there are material risks that the IMF programme does not deliver the outcomes that are currently expected. This could lead to a deterioration in Sri Lanka’s credit metrics to levels no longer comparable to B1- rated sovereigns.
In June 2016, Moody’s affirmed Sri Lanka’s B1 ratings and changed the outlook to negative from stable. The action was prompted by: 1) Our expectation of a further weakening in some of Sri Lanka’s fiscal metrics in an environment of subdued GDP growth which could lead to renewed balance of payments pressure. 2) The possibility that the effectiveness of the fiscal reforms envisaged by the government may be lower than we currently expect, which could further weaken fiscal and economic performance.
The negative outlook signals that an upgrade is unlikely. Evidence of effective reform implementation leading to significant and lasting improvements in tax collection would be positive. Such an improvement, coupled with reforms of macroeconomic policy that lead to more stable external financing conditions, would support a return of the rating outlook to stable.
Conversely, signs that the fiscal consolidation measures are ineffective or that the authorities’ commitment towards fiscal consolidation is wavering would point to a higher debt burden for longer and put negative pressure on the rating. In particular, if such developments were accompanied by a marked fall in foreign exchange reserves and lack of market access, a downgrade to the rating would be possible.