Sri Lanka rating supported by growth, constrained by govt finances: Moody’s

July 30, 2015 (LBO) – Sri Lanka’s credit outlook could improve if the government debt and interest payment ratios were to stabilize at considerably lower than current levels, Moody’s Investors Service said in a recent credit outlook report.

Sri Lanka’s state credit is rated ‘B1’ below investment grade, by the rating agency.

“Sri Lanka’s B1 government bond rating is supported by its record of strong growth, but constrained by high government debt ratios,” Moody’s Investors Service said.

“The rating outlook is stable, incorporating Moody’s expectation that the ongoing growth slowdown and political uncertainty around the August parliamentary elections is unlikely to lead to medium term credit deterioration,”

“On the other hand, a reversal of policy efforts to maintain macro-economic balance, lower fiscal deficits and improve the investment climate would likely lead to downward pressure on the rating outlook.”

Since the end of Sri Lanka’s civil war in 2009, Sri Lanka’s economy has reaped a peace dividend in the form of GDP growth averaging around 7.5 percent annually and strong inflows of both foreign direct and portfolio investment.

“Although growth has slowed in recent quarters, Moody’s expects average growth to continue to compare favorably to peers over the rating horizon,”

However, Moody says that the Island’s sovereign credit profile faces challenges posed by Sri Lanka’s government debt ratios, which, even though they have declined over the last decade, remain higher than the median for similarly rated peers.

“Consequently, interest payments consume almost a third of government revenues, and limit the fiscal flexibility to increase spending on infrastructure or to introduce fiscal measures to offset a slowdown in growth,” Moody says.

The rating agency says as a relatively small economy with a current account deficit, Sri Lanka is exposed to uncertain global growth and financial conditions in coming months, although the risks of this exposure are somewhat mitigated by the balance of payments benefits of lower oil prices.

Lower oil prices have also helped subdue inflation, which was higher and more volatile than peers in past years, Moody says.