Fitch affirms ‘B+’ rating for SL

Fitch Ratings has affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a Stable Outlook, but warned of vulnerabilities created by high debt repayments, interest rates and challenges for the banking sector.

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 program have improved Sri Lanka’s policy coherence and credibility. 

Although GDP growth of an estimated 3.9% in 2017 fell short of forecasts due to weather-related supply disruptions, Fitch expects growth to recover and stabilise at around 5% in 2018 and 2019.

“We think the increase in general government revenues will support a further narrowing of the budget deficit to 4.8% of GDP in 2018 and 4% in 2019 from an estimated 5.2% in 2017. 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,” 

Sri Lanka’s interest payments as a share of revenues remain exceptionally high at an estimated 38% at end-2017, far above the medians of 9.4% for ‘B’ and 9.6% for ‘BB’ rated sovereigns. The expected pick-up in general government revenues should lead to lower ratios over time, but Fitch expects this ratio to remain above the ‘B’ and ‘BB’ medians for the foreseeable future. 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 in 2018 and 75.8% in 2019, from an estimated 79.5% at end-2017 under our baseline assumptions, mainly on account of sustained primary surpluses and stable GDP growth rates. However, even after the forecast reduction, government debt would still remain above the ‘B’ and ‘BB’ medians at 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,” the statement released by Fitch said.

Fitch’s outlook for the banking sector is negative, based on its assessment of a difficult operating environment. This is reflected in an increase in NPLs following a period of rapid credit growth and some capitalisation pressures. See full report on Page 8