Sri Lanka 10-year bond rated (P)B1 by Moody’s

Sri Dharanee Performance Arts Theatre

July 17, 2012 (LBO) – A 10-year sovereign bond launched by Sri Lanka Tuesday in international markets has been rated (P) B1 by Moody’s, a rating agency which said the country’s external sector has stabilized following policy measures. “The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs,” Moody’s said.

“However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.

“Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage.

“As such, Moody’s assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework.”

The full statement is reproduced below:

Moody’s assigns a provisional rating of (P)B1 with positive outlook to Sri
Lanka’s proposed global bond

Singapore, July 17, 2012 — Moody’s has assigned a provisional foreign
currency rating of (P)B1 with a positive outlook to the government of Sri
Lanka’s proposed U.S. dollar-denominated global bond.

RATINGS RATIONALE

Sri Lanka’s B1 sovereign rating reflects Moody’s Investors Service’
methodological assessment of the country’s low economic and government
financial strengths, moderate institutional strength, and a moderate
susceptibility to event risks.

The outlook for the sovereign rating was changed to positive in 2011,
reflecting an increasingly evident peace dividend reflected in greater
macroeconomic stability, as well as a policy orientation of fiscal
reform and economic growth that continues to be guided by an IMF program.
In addition, the monetary authorities have established a regulatory and
supervisory framework supportive of financial stability.

Robust growth momentum carried into 2012 with real GDP growing by 7.9%
year-on-year in the first quarter. However, pressures on the balance of
payments that had built up since mid-2011 prompted macroeconomic policy
tightening starting in February 2012 to temper widening trade balances
and declining foreign exchange reserves.

The external payments position has stabilized, although greater exchange
rate flexibility may be reflected in higher inflation in the near-term.
The growth outlook has also moderated somewhat, but trend fiscal
consolidation remains intact with both the budget deficit and stock of
debt continuing to fall as a percentage of GDP.

The rating continues to be encumbered by the reduction of its large debt
overhang and the consequently large debt servicing costs. However, Sri
Lanka is well-placed to grow out of its debt given its still-favorable
outlook for economic growth, while the government has taken measures,
such as recent tax reforms, to further strengthen its financial
position.

Another concern is the re-integration of the Tamil minority in the
war-torn northeast region. Although there has been notable progress, we
consider that the process of political reconciliation is at an early
stage. As such, Moody’s assessment of event risk remains somewhat
elevated, but at a moderate level in our global bond methodology
framework.