Sri Lanka sovereign bond rated ‘BB-(EXP)’ by Fitch

Apr 07, 2014 (LBO) – Fitch Ratings has given a ‘BB-‘ ‘Expected’ rating for Sri Lanka’s 500 million US dollar sovereign bond. Fitch said a fiscal deficit of 5.9 percent of gross domestic product in 2013 and a debt burned of 78.3 percent of GDP was at “relatively high levels’ but the 2014 budget signaled commitment to better management.

But Sri Lanka’s external finances was weaker with foreign debt of 35.9 percent of GDP, with similar rated other countries having only 18.9 percent of debt.

The full statement is reproduced below:-

Fitch Rates Sri Lanka’s US Dollar Bond at ‘BB-(EXP)’

Fitch Ratings-Hong Kong-07 April 2014: Fitch Ratings has assigned Sri Lanka’s forthcoming US dollar-denominated global bonds due 2019 an expected rating of ‘BB-(EXP)’. The final rating is contingent on the receipt of final documentation conforming to information already received. The expected rating is in line with Sri Lanka’s current Long-Term Foreign Currency Issuer Default Rating (IDR) of ‘BB-‘ with Stable Outlook. The sovereign’s Long-Term Local Currency IDR is also ‘BB-‘ with Stable Outlook.

KEY RATING DRIVERS

Sri Lanka’s ‘BB-‘ IDRs reflect the following key rating drivers:

– Relatively strong growth, a comparatively high level of basic human development (as indicated by the UN’s Human Development Index) and a solid payment record.

– The fiscal deficit (5.9% of GDP in 2013) and government debt burden (78.3% of GDP in 2013) remain at relatively high levels, although the 2014 budget signals commitment to medium-term debt reduction and an ability to maintain a gradual fiscal consolidation trend.

– The external finances form a weakness with a persistent but narrowing current account deficit and higher net external debt level (35.9% of GDP) compared with peers also rated in the ‘BB’ category (on average, 18.9% of GDP).

RATING SENSITIVITIES

A Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are well balanced.

The main factors that individually, or collectively, could trigger negative rating action are:

– An extended period of economic overheating accompanied by a large surge in inflation.

– A material deterioration in the public finances, which leads to a substantial increase in Sri Lanka’s general government debt-to-GDP ratio.

– Intensification in external financing risks, particularly a renewed widening in the current account deficit combined with a fall in capital inflows.

The main factors that individually, or collectively, could trigger positive rating action are:

– Sustained improvement in the macroeconomic outlook that is consistent with healthy economic growth coupled with moderate and stable inflation and external equilibrium.

– A material improvement in Sri Lanka’s public finances underpinned by a higher government revenue-to-GDP ratio and conversely a large decline in the general government debt-to-GDP ratio.

– Significant improvement in external finances, with smaller current account deficits and higher levels of non-debt capital inflows (that is, foreign direct investment).

KEY ASSUMPTIONS

– Sri Lanka’s political landscape remains broadly stable and there is no renewal in the civil conflict that previously lasted 26 years and ended in 2009.

– No sustained rise in commodity prices, particularly in crude oil, in line with Fitch’s Global Economic Outlook.