Sri Lanka among most exposed countries to an interest rate shock: Moody’s

May 14, 2018 (LBO) – Moody’s Investors Service said the probability of an interest rate shock tends to be higher for Sri Lanka as the country is most exposed to a higher cost of debt that feeds mostly through weaker debt affordability.

“The sovereigns most vulnerable to an interest rate shock are generally low rated, with shorter maturities and weak debt affordability,” said Elisa Parisi-Capone, a Moody’s Vice President.

“In our view, exposure to a shift in financing conditions is highest for Lebanon, Egypt, Pakistan, Bahrain and Mongolia. Sri Lanka (B1 negative) and Jordan are also highly exposed.”

For five of the 10 most exposed sovereigns Lebanon, Pakistan, Mongolia, Sri Lanka and Bahrain, Moody’s assessment of fiscal strength is “Very Low (-),” the weakest on the 15-rung scale in our global sovereign rating methodology.

“While weak fiscal strength is already a key feature of these countries’ credit profiles, a deterioration in fiscal metrics that would further exacerbate liquidity and external risks could weaken credit quality in either of the two potential shocks that we study,” Moody’s said.

“Under a higher cost of debt, there would be pronounced shifts in debt affordability (interest to revenue) and burdens (debt to GDP) for these sovereigns.”

Moody’s said a shock to funding costs feeds through to debt affordability relatively quickly and pressure on capital flows and the exchange rate would erode foreign exchange reserves and exacerbate external vulnerability.

This is particularly relevant for Lebanon, Pakistan, Bahrain and Jordan and Sri Lanka although the latter is moving toward a more flexible exchange rate, Moody’s further said.

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Weakest MENA and APAC sovereigns would be most sensitive to an interest rate shock