Sri Lanka expropriation could hurt credit, investment: Moody’s

Nov 14, 2011 (LBO) – A law to expropriate assets of dozens of private firms including two listed companies could hurt the island’s credit, cloud its investment climate and has created uncertainty about property rights and policy, Moody’s a rating agency said. “Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka,” Moody’s said in a statement.

“The government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.”

Moody’s is one of three rating agencies to cover Sri Lanka.

The statement is reproduced below

Sri Lanka Expropriation Bill Dampens a Positive Credit Story

Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka. The government’s seizure of assets creates ambiguity around the protection of private property in Sri Lanka.

The stated purpose for seizing the assets is that they are either underutilized, idle, have had no ongoing business operations for many years, or that their use contravened the public interest.

Two of the seized land assets were held by companies listed on the stock exchange. It is unclear, however, whether the assets will be managed by the state or resold to other investors, and how performance will be revived. The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current government to exert strong and direct influence over the economy. Nonetheless, Sri Lanka’s Supreme Court ruled early last week that the bill was not inconsistent with Sri Lanka’s constitution.

Since the end of the 26-year long civil war in 2009, Sri Lankans have reaped a peace dividend of stronger economic growth: real GDP growth picked up to 8% in 2010 from an average of 4.7% during the conflict and there’s much greater consumer price, exchange rate and financial market stability.

Maintaining investor confidence is key to Sri Lanka’s ability to continue to collect the peace dividend. The authorities have embarked on a broad-based effort to review and reform regulations hindering investment to attract more private sector participation in the economy. But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate. If so, it would be credit negative for Sri Lanka.