Moody’s cuts SL GDP forecast to 2.6-pct amid challenges of tourism, debt refinancing

Jun 20, 2019 (LBO) – Moody’s Investors Service have revised down their 2019 real GDP forecast to 2.6 percent from the previous estimate of 3.4 percent based on prospects for lower tourism arrivals and spending.

Terrorist attacks of April 2019 will curb tourism, adding pressure to public and external finances, the firm said in their latest report.

In this report, they have analyzed the implications of the country’s financing needs and options, the recent terrorist attacks and upcoming elections for Sri Lanka’s credit profile.

“Slower real and nominal GDP growth than we previously envisaged will further challenge the government’s revenue and fiscal deficit projections,” the firm said.

“Lower income from tourism will hurt tax receipts and government finances, and weigh on the current account deficit and foreign exchange inflows.”

The report said that political tensions could resurface before and after presidential elections in late 2019 and a parliamentary election in 2020.

“While the IMF programme provides an anchor for reform through June 2020, volatile domestic politics can hinder policy implementation, as seen in late 2018,” the firm said.

“Delays in the pace of reform would result in an even slower pace of fiscal and debt consolidation in the next few years than we project.”

That could undermine international investor confidence, and threaten the government’s ability to refinance its upcoming debt obligations at moderate cost.

According to Moody’s Investors Service, large external debt refinancing schedule dominates credit risks over the next five years.

In particular, the government is due to make principal payments of more than 3 billion dollars per year on external government debt from 2020-24.

A range of financing options, including international dollar bond issuance and loans from other bilateral and multilateral lenders, could support refinancing.

“But the government will remain highly vulnerable to sudden shifts in investor sentiment tha could affect the availability and cost of these funding sources.”

Foreign exchange reserve coverage of forthcoming government debt maturities and economy-wide external debt obligations is low – a factor that will keep the government’s and the country’s refinancing risks elevated.