Sri Lanka’s ‘B+’ rating confirmed by S&P; warns on debt, institutions

Aug 01, 2013 (LBO) – Standard and Poor’s has confirmed Sri Lanka’s ‘B+’ sovereign rating with a stable outlook but warned on government debt and weak institutions. Sri Lanka’s external liquidity remains exposed to international liquidity conditions. Through 2015, we project that Sri Lanka’s gross external financing needs will exceed 120% of current account receipts (CAR) plus usable reserves. We also forecast that the country’s external debt–net of official reserves and financial sector external assets—will be more than 100% of CAR.

We expect Sri Lanka’s gross international reserves to remain at three months’ coverage of current account payments in December 2013, a similar level to that in 2012. That’s despite decisive action from the government and the central bank in early 2012 to improve the country’s external position, through allowing the Sri Lankan rupee to depreciate and reining in credit expansion.

Fundamental fiscal weaknesses remain although the government’s fiscal metrics have improved over the past three years. We project the annual growth in general government debt will be 7.4% of GDP on average for 2013-2016. We expect net general government