Sri Lanka’s foreign debt servicing payments to top $15B over four years to 2022-Fitch
By Paneetha Ameresekere-2018-02-09
The sovereign's (Sri Lanka's) external debt service payments over this period are around US$ 15 billion against current reserve levels of about $ 7.7 billion. The authorities expect to pass a liability management bill this year (2018), which would allow them to smooth debt payments by potentially extending maturities over this period. However, the scale of external refinancing over the next few years creates a potential vulnerability for the sovereign, particularly against a backdrop of expected monetary tightening in developed markets. However, Sri Lanka's track record of accessing international capital markets remains a mitigating factor.
Fitch however, affirmed Sri Lanka's below investment grade rating of ''B+'; Outlook Stable.'
Fitch's minimum investment grade rating for a country is 'BBB-Outlook Negative.' Sri Lanka therefore, is several notches below Fitch's investment grade rating.
Nonetheless, the island's 'structural' factors, such as governance standards, GDP per capita and levels of human development are high compared with the 'B' and 'BB' medians and continue to provide support to the rating, said Fitch.
In the United Nation's Human Development Index, Sri Lanka ranks in the 61st percentile compared with the 'B' median of the 36th percentile. On the World Bank's composite governance indicator score, Sri Lanka ranks at a favourable 48th percentile against the 'B' median of the 31st percentile, the rating agency said.
Fitch further said that the affirmation of Sri Lanka's sovereign ratings reflects the following factors: Sri Lanka's revised policy framework supports macroeconomic stability. In Fitch's view, policies aimed at fiscal consolidation and maintenance of a disciplined monetary stance under the framework of the three-year IMF-supported programme have improved Sri Lanka's policy coherence and credibility. Although GDP growth of an estimated 3.9 per cent last year fell short of forecasts due to weather-related supply disruptions, "we expect growth to recover and stabilize at around five per cent this year (2018) and in the next (2019)," said Fitch.
The shift towards greater exchange-rate flexibility since the second half of 2015 has strengthened the external position, and the planned shift towards flexible inflation targeting should further enhance monetary policy credibility, said Fitch.
Credit growth has declined to a more sustainable level of around 15 per cent last year (2017) from a high of 20 per cent in 2016. Fiscal performance has improved following the approval and implementation of tax reforms. Fitch expects Sri Lanka's ratio of general government revenue to GDP to improve to 15.5 per cent of GDP this year (2018) and to 16.2 per cent of GDP in the next (2019), from a low of 11.6 per cent in 2014, reflecting the passage of revenue enhancing measures under the IMF programme, said Fitch.
Those include an increase in the VAT rate to 15 per cent in 2016 from 11 per cent and implementation of a new Inland Revenue Act from 1 April of this year (2018) that aims to simplify tax laws, reduce exemptions and improve the efficiency of the tax system.
"We think the increase in general government revenues will support a further narrowing of the budget deficit to 4.8 per cent of GDP this year (2018), from 5.2 per cent in the last (2017) and four per cent of GDP in the next (2019)," said Fitch.
"While these revenue reforms should be positive for a more credible fiscal framework over time, ineffective implementation and/or weaker-than-expected GDP growth remain downside risks to our fiscal projections," the rating agency said.
Sri Lanka's interest payments as a share of revenues remain exceptionally high at an estimated 38 per cent at last year end (2017), far above the medians of 9.4 per cent for 'B' and 9.6 per cent for 'BB' rated sovereigns, it said.
The expected pick-up in general government revenues should lead to lower ratios over time,' but we expect this ratio to remain above the 'B' and 'BB' medians for the foreseeable future,' said Fitch.
Further, despite the expected improvement in gross general government debt (GGGD) dynamics, GGGD will likely remain above the 'B' median over 2018-2019. GGGD is forecast to decline to 77.2% of GDP this year (2018) and to 75.8 per cent in the next (2019), from an estimated 79.5 per cent at last year end (2017), the rating agency said.
These assumptions are based, mainly on account of sustained primary surpluses and stable GDP growth rates, said Fitch.
However, even after the forecast reduction, Government debt would still remain above the 'B' and 'BB' medians at next year end (2019).
Further, nearly half of Sri Lanka's Government debt is denominated in foreign currency, which increases the risk to debt dynamics in the event of a further depreciation of the Sri Lankan rupee. Sri Lanka's external balance sheet remains a weakness for the rating, with high net external debt, weak sovereign net foreign assets and a low international liquidity ratio compared with rating peers.
Foreign-exchange reserves rose to around US$ eight billion at last year end (2017), representing 3.3 months of current external payments (CXP), from $ six billion (2.7 months) at end-2016, but reserves remain below the rating category median of 3.9 months, said Fitch.
The improvement in reserves reflects the allowance of greater exchange-rate flexibility, as well as a combination of foreign exchange (FX) purchases from the market, inflows from the Hambantota Port lease and new external borrowings.
Fitch's outlook for the banking sector is negative, based on our assessment of a difficult operating environment. This is reflected in an increase in non performing loans (NPLs) following a period of rapid credit growth and some capitalization pressures, the rating agency said.
