SL’s sovereign credit constraint level comparing favourably in South Asia

By Hiran H.Senewiratne-April 26, 2016

The debt levels of numerous governments in the South Asian region are elevated and pose a sovereign credit constraint for several of these countries, including Sri Lanka, Moody's rating agency said.

Sri Lanka has been rated B1 (stable) when compared to India which has been rated Baa 3 (positive) and Pakistan B3 stable, which indicates that Sri Lanka's sovereign credit constraint level is better when compared to top SAARC region countries, Moody's ratings indicated.

Moody's ratings for other countries are; Japan (A1 stable), Malaysia (A3 stable). But the government debt ratios have climbed in Australia (Aaa stable), Mongolia (B2 negative), Papua New Guinea (B2 stable) and Vietnam (B1 stable). Although Indonesia's (Baa3 stable) government debt is moderate, its reliance on foreign currency and external debt poses risks.

State-owned enterprise liabilities are large in China (Aa3 negative), and smaller but still material in Korea (Aa2 stable), Malaysia, Sri Lanka and Vietnam.Therefore, the Sri Lankan government has taken a policy decision for SriLankan Airlines (unrated), which has been running operating losses for several years, to be merged with a private sector entity, Prime Minister Ranil Wickremesinghe said.

Sri Lanka has Treasury guarantees of over 4 percent of GDP. Some of the guarantees, such as those related to the Road Development Agency, which has little revenues of its own, have to be met by the government while loss making State Owned Entities (SOE's) will be also ultimately bailed out by the people.Sri Lanka had a central government debt of 76 percent of gross domestic product compared to an average of 48 percent for other 'B' rated countries.

When it comes to corporate leverage in international financial centers, Hong Kong (Aa1 negative) and Singapore (Aaa stable) appear high relative to GDP, partly because they fund borrowers' overseas operations, not captured in domestic growth data but reflected in large foreign assets. If slower regional growth reduced the debt repayment capacity of some borrowers, bank asset quality would suffer.

However, strong bank capitalization and regulatory oversight mitigate this risk. In Indonesia, corporate borrowing is moderate compared to output, but a previous build-up in private sector external debt exposes companies to currency fluctuations.