Sri Lanka’s credit rating upgrade depends on IMF compliance: Fitch

Jan 10, 2017 (LBO) – Sri Lanka’s potential improvements in sovereign credit profiles will depend on the country’s level of compliance with IMF conditions, as implementation risks are often high, Fitch Ratings says.

Support from the IMF has helped to mitigate external liquidity risks and reduced the medium-term default risks in several frontier markets that entered into new programmes in 2016, the Ratings agency said in a statement.

The new programmes of the IMF in frontier markets such as Sri Lanka have helped such economies mitigate external liquidity risks and reduce medium-term default risks.

Fitch said that a lack of currency flexibility had been a factor in pushing Sri Lanka, Egypt and Suriname into the IMF agreements, since they had spent foreign exchange reserves at unsustainable levels trying to defend their currencies during a period where the dollar gained strength.

“However, they have allowed more flexibility since beginning discussions with the IMF, which has helped reduce pressure on their external balance sheets.”

IMF loans should alleviate external liquidity pressures and reduce the risk of sovereign default, particularly where IMF assistance has been supported by other multilateral assistance or has improved access to global bond markets.

However, all of these countries still have either large current-account or fiscal deficits, or both, the statement added.

“Reducing these vulnerabilities will be key to stabilising or improving their ratings.”