Sri Lanka outlook on ‘B1’ rating cut to stable by Moody’s

July 02, 2013 (LBO) – Moody’s Investors Service has cut the outlook on Sri Lanka’s ‘B1’ credit rating to ‘stable’ from ‘positive’ on rising bank foreign debt and continuing budget deficits and high state debt. Related to the debt level was slowing economic growth. After growing 8.1 percent in 2010 and 2011, economic growth had since slowed.

“Looking ahead, the government projects highly favorable macroeconomic developments,” the rating agency said.

“By 2015, it expects growth to accelerate to 8.3 percent, the current account deficit to diminish to 1.4 percent of GDP, and official foreign reserves to surpass $10 billion, in large part as a result of a substantial increase in foreign direct investment.

“However, Moody’s also believes that internal policy challenges, and global economic headwinds and financial cross-currents will make achieving such targets challenging.”

Moody’s said a said a “sustainable rise in official foreign exchange reserves” and reduction of its external vulnerability indicator below 100 percent, higher growth and lower deficits would help upgrade the rating.

A shift away from debt financing to foreign direct invest would help the rating.

A worsening of polit