July 10, 2014 (LBO) – Countries with high levels of externally financed domestic credit should be careful about loose monetary policy, a report by Standard and Poor’s which found Sri Lanka to be most exposed in the region after New Zealand said. Several Asian countries including China were loosening policy in response to a slowing economy, but loosening policy could increase financial risks even though it may lift short term growth, the rating agency said.
“The risks are greater where significant external funds support domestic lending,” S&P said in a mid-year review of 22 Asia Pacific sovereigns rated by the agency.
“These economies are vulnerable to negative swings in sentiments among international lenders. This also means that these governments have little room for policy mistakes.”
Earlier this week S&P confirmed Sri Lanka’s B+ speculative grade sovereign rating, citing low inflation and gains in state enterprise balances.
On 5 parameters looked at by S&P Sri Lanka’s Economic Structure and Growth was considered Neutral and Monetary Flexibility also Neutral.
But Institutional and Governance Effectiveness was considered a Weakness, Fiscal Flexibility and Performance a Weakness, External Liquidity and International inv