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Sri Lanka faces external refinancing and political uncertainty risks: Fitch

Global credit rating agency Fitch Ratings has warned that the scale of near-term external refinancing over the next few years creates a potential vulnerability for Sri Lanka amidst 3 years of heavy debt servicing and rising US interest rates.

“The sovereign’s projected debt service payments are significant, at US$ 15 billion in 2019 – 2022, from a bunching of sovereign bond redemptions, while its foreign-exchange reserves stood at only US$ 9.3 billion at end-June.  The scale of external refinancing over the next few years creates a potential vulnerability for the sovereign particularly as US interest rates are on the rise.”

US Federal Reserve, the country’s central bank, has raised interest rates twice in 2019 and is expected to raise rates at least two more times this year, citing a solid economy with fewer Americans out of work. It has also pencilled in three more rate hikes for 2019.

Fitch made this assessment in its ‘APAC Sovereign Credit Overview 3Q18’ published today (03rd September). It has forecast that Sri Lanka will grow 3.8% in 2018.

Fitch noted that the Sri Lankan Government has made progress on critical fiscal reforms, including the approval of the automatic fuel pricing formula, the introduction of an automatic electricity pricing mechanism and moves towards restructuring SriLankan Airlines.

The rating agency highlighted political uncertainty as a potential barrier to the continuation of these progressive measures, but said that the election schedule makes a sudden change in Government unlikely.

“Political uncertainty increased following the ruling coalition’s heavy losses during the local elections in February, followed by a vote of no-confidence against the Prime Minister in April and temporary suspension of parliament in May. The risk of political uncertainty disrupting policy continuity, however, is mitigated by the election schedule, in which presidential elections are not due until end-2019, with parliamentary elections to follow.”

It added that Sri Lanka’s B+ rating with a Stable outlook, assigned on 6 February 2018, balances an improving policy framework, which supports macroeconomic stability and rising government revenues, against a challenging external debt servicing outlook and high government debt.

“The rating is supported by higher per-capita income levels and stronger governance standards than the ‘B’ category median,” it said.

However, Fitch noted that Sri Lanka’s government debt remains high at around 77% of GDP, far above the ‘B’ median of 66.6%.

The ‘APAC Sovereign Credit Overview 3Q18’ said that economic activity across the APAC region held up through the first half of 2018 on strong domestic demand and robust exports. However, it said that jitters from rising trade tensions between US and China and global risk aversion towards emerging-market assets are generating capital outflows and downward pressure on some of the region’s currencies.