Sri Lanka war, BOP crisis no longer hurt rating; budgets a problem: Fitch official

Aug 27, 2009 (LBO) – Sri Lanka’s internal conflict and a balance of payments crisis that led to a rating downgrade and a negative outlook have now been wiped off the slate, but weak state revenues and high national debt are hurting Sri Lanka’s rating, a senior Fitch official said. In April 2008, Fitch downgraded Sri Lanka’s sovereign rating by one notch to ‘B+’ on an intensifying conflict, and in February 2009, the outlook was lowered to ‘negative’ when amid a balance of payments crisis, as authorities defended a dollar peg.

Off the table

“We saw uncertainty with the direction of the war and in the external payments position at the time,” James McCormack, Fitch’s head of Asia sovereign ratings said.

“Both factors are no longer there.”

A 30-year war with Tamil Tiger separatists ended in May.

“The end of the war is a clear positive,” McCormack said.

“But one of the big issues for us is fiscal policy.

“There has been a pretty steady fiscal deterioration. There is a real revenue problem. That is what is contributing to the deficit.”

Reducing the deficit will allow the private sector to grow, he said.

McCormack says some countries in the region, including higher rated ones, had seen larger fiscal reversals during the crisis, incl