Sri Lanka’s war, fiscal reversals, policy stance hit sovereign rating: S&P

April 16, 2008 (LBO) – Sri Lanka’s internal war and a reversal in ‘tentative’ improvements in state finances had made the country less able to weather shocks, putting its credit rating at risk, the rating agency Standard & Poor’s said. The rating agency said debt ratios were above the average for the ‘B+’ rating awarded to Sri Lanka and further fiscal reversals will result in a downgrade. Sri Lanka’s credit outlook was cut to negative earlier in the year.

Debt Problem

Government debt composition had also worsened, in maturity, currency and source.

“The rising share of external debt, estimated at about 49 percent of total, and within that, the proportion of more expensive and shorter maturity commercial funds, is gradually eroding what has so far been a relatively favorable debt profile,” S&P said in a report on emerging market countries Wednesday.

The rating agency said recent gains in national debt came from inflating away debt, with interest rates being lower than 20 percent inflation, allowing the government to run “large fiscal deficits without a significant corresponding rise in public debt as a share of GDP.

“Further signs of fiscal slippage, either through expenditure pressures or lower revenue