Sri Lanka sovereign bond rated ‘B’ by S&P

Oct 14, 2009 (LBO) - Standard and Poor's has give a 'B' rating to an upcoming 500 million US dollar sovereign bond by Sri Lanka maturing in 2015, with a 'stable' outlook citing a deal with the International Monetary Fund that has improved foreign reserves. "The sovereign credit ratings on Sri Lanka take into account improving external liquidity and favorable growth prospects, given a resilient economy and the positive impetus of the end of the country's long civil conflict," S&P said.

"These factors are balanced against prevailing fundamental fiscal weaknesses and attendant high level of public debt burden."

Fitch said the economy has performed "relatively well" in a global slump, and economic growth is expected at 3.2 percent for 2009, with upside potential.

In the medium term, growth is expected to rebound to 6 to 7 percent per year as consumption and investment benefit from lower domestic interest rates, improved security, and stepped up public investment.

Rising demand for Sri Lanka's exports as the global economy rights itself will also boost growth, S & P said.

S&P said foreign reserves are reported at 4.4 billion US dollars up from 1.3 billion US dollars in March 2009 following a stand by arrangement (SBA) with the IMF.

But about half the about 50 percent of the increase in reserves has created an external liability and included volatile portfolio flows.

"This exposure represents a source of vulnerability in the balance of payments, but we believe that the central bank's policy commitments under the SBA will help maintain investor confidence and mitigate some of these risks," S & P said.

The rating agency said "perennial large fiscal deficits" and a "high level of public debt" hurt Sri Lanka's rating.

Budget deficits had averaged of 7.8 percent of gross domestic product (GDP) over the past decade and net general government debt was 80.3 percent of GDP at end 2008.

An estimated 33 percent of general government revenues were needed for interest payments.

"These metrics are well above the median for similarly rated sovereigns and remain a source of significant vulnerability to macroeconomic and external stability," S&P said.

"Standard & Poor's believes that in trying to reduce these vulnerabilities, the IMF's SBA will provide a policy anchor, while the present favorable constellation of domestic political, economic, and external factors provides a unique opportunity for the administration to implement comprehensive fiscal reforms.

"However, in view of the difficult prospects for reforms of public expenditure in particular and some major public enterprises, Standard & Poor's expects only moderate and gradual fiscal improvement, with deficits remaining at 6 to 7 percent of GDP in the next few years."

Fitch has rated the upcoming bond a notch higher at 'B+'

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