Sri Lanka policy remains ‘overly growth biased’: Fitch

• From an economic policy perspective Government change hasn’t made a huge impact
• SL needs foreign investments to meet the deficiency in its domestic savings

Fitch Ratings Head of Asia-Pacific Sovereign Ratings Andrew Colquhoun in an interview with the Bloomberg recently talks about the Sri Lankan Parliamentary elections and economy. Following are excerpts of the interview:

Andrew Colquhoun

Q: When you look at the regime change seven months ago, where Rajapaksa was ousted from his 10-year governing, to what happened yesterday, which essentially was a consolidation of power for President Sirisena, how do you view this for Sri Lanka on the global stage?

A: For us it is the less about personnel or party composition of the Government, it is more about the economic policies the Government is following, particularly in an external environment which seems to be getting more challenging. The change of government in January was hailed for good governance, corruption and so forth; from an economic policy perspective it hasn’t made a huge amount of difference. One of Sri Lanka’s weaknesses for some time has been an overly growth biased approach of policymaking. In February the new Government introduced a populist budget, monetary policy has been easy, credit growth has been accelerated and the pressures are showing in the external finances.

 

Q: What has really shifted because of politics is the relationship with China, one of the top investors, the biggest Government lender, and Sirisena seems to be moving away from that. Does that have any play in how you regard Sri Lanka?

A: It’s interesting that President Sirisena said before the election that China would be a priority if his coalition remains in power. However, from our perspective what’s more important is the yawning gap between Sri Lanka’s external finances, pressure on foreign reserves, currency, year-to-date. Sri Lanka needs foreign investment to plug that gap to meet the deficiency in its domestic savings. So alienating one of its major investors is not necessarily the correct thing to do.

 

Q: So what you’re saying is to move back to China or at least move back to welcoming more foreign investment for Sri Lanka?

A: From my perspective the issue is really the persistent current account deficit, the build-up in external debt, short-term external debt particularly, the increasing dependency on dollar debt sales in the domestic market, which is an echo of what happened in 2008. As I said earlier, the weak approach to policy making. Sri Lanka had an IMF program in 2009-2012 where they repeatedly went off-track. So these are the issues that we are focused on. 

 

Q: Of course China’s exposure is not only for Sri Lanka, but it is also for the emerging markets in the region; that’s had quite an effect as well. Talk about emerging markets health here…

A: I think the RMB’s depreciation last week was partially unwarranted and certainly triggered a bit of a market reaction, which shows the focus on this issue. We were much less worried about it; more broadly we think that the Chinese economy is not doing too badly as many people seem to think. Nevertheless there was a perception that those countries that are exposed to China would suffer as a result.