Fiscal and investment policies to determine post-election credit outlook: Moody’s
Friday, 16 January 2015 00:00
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Moody’s has said that the new Government’s fiscal and investment policies will determine Sri Lanka’s sovereign credit outlook.
Following the conclusion of the presidential poll and election of a new President, Moody’s issued the following statement.
Last Friday, Sri Lanka’s (B1 stable) election commission declared that the Opposition candidate Maithripala Sirisena won 51.3% of the vote, securing a victory against incumbent President Mahinda Rajapaksa who gained 47.6% votes, in a snap presidential election that the latter called two years ahead of schedule. The victory for Mr. Sirisena marks the end of former President Rajapaksa’s nearly decade-long rule that he was seeking to extend for a third, six- year term.
The first change in President since the end of the civil war in 2009 builds on Sri Lanka’s democratic process. Whether the political transition has meaningful sovereign credit implications will depend on the fiscal and investment policies Sirisena’s administration pursues.
Sirisena served as Health Minister in Rajapaksa’s administration, but the extent to which he will maintain or reverse current fiscal and investment policies is not apparent from his election manifesto, which focused primarily on governance and social issues, such as corruption, decentralisation of political power and religious/ethnic cohesion.
We expect statements accompanying the appointment of the Cabinet and a new Central Bank Governor to offer clarity on the administration’s economic priorities over the next few days.
Sirisena garnered the support of several political parties with varying policy priorities, which could influence policy content. In addition, the outcome of parliamentary elections, likely to be held in April, will determine whether the new president will have the parliamentary support required for the passage of legislation to support his administration’s policy agenda.
Sri Lanka’s new president inherits a fast-growing economy, but one with a large government debt burden. Post-war investment projects and reconstruction in the north and east provinces have helped sustain growth at 7.5% between 2010 and 2013.
Helped by higher growth, authorities reduced the fiscal deficit to 5% of GDP in 2014 from 9.9% in 2009, and lowered government debt to 78.3% in 2013 from 86.1% of GDP in 2009. Nonetheless, debt remains significantly above the median of 41% for B-rated sovereigns. Consequently, interest payments on debt consume about 40% of the Government’s revenue, among the highest such ratios within Moody’s sovereign rated universe. Moreover, about 43% of the Government’s debt is denominated in foreign currencies, leaving the Government’s financing profile vulnerable to volatility in the exchange rate and international credit markets.
Sri Lanka’s post-election credit outlook will depend on whether policies will continue to promote growth while successfully paring down Government debt.
During the election campaign, Sirisena had said that he would reassess large projects initiated by the previous administration and ensure that the Sri Lankan economy did not rely on a single country for investment. How this translates into regulatory and foreign policy, particularly towards China, which has become the largest overseas investor in Sri Lanka, could determine the pipeline for investments, a vital driver of Sri Lanka’s post-war growth.
