Reserves drop poses rating risk: Fitch, S&P

Thursday, 1 March 2012 00:26 - - {{hitsCtrl.values.hits}}

Reuters: Fitch and Standard & Poor’s rating agencies yesterday warned Sri Lanka that its sovereign credit rating was at risk due to the country’s weak external position and the depletion of its foreign currency reserves to protect the rupee exchange rate.

The country’s Central Bank, which is under a $ 2.6 billion International Monetary Fund (IMF) loan programme, for months last year disregarded the global lender’s warning that the policy of defending the rupee was unsustainable.

The monetary authority blew through more than $ 2.7 billion in the second half of last year staving off depreciation pressure, cutting its forex reserves by a third. At the same time, rising oil prices produced a record trade gap.

Fitch in a special report said the sharp drop in reserves in the second half of 2011 has increased the risks on the sustainability of the country’s balance-of-payments.

Going a step further, S&P revised down the country’s sovereign rating outlook to stable from positive due to the external imbalances stemming from a decline in the reserves. “We revised our outlook on the long-term foreign currency rating to reflect the country’s deteriorating external liquidity,” S&P Credit Analyst Takahira Ogawa said.

S&P said it may lower the rating if there is “substantial further deterioration” of external liquidity or if Sri Lanka’s growth and revenue prospects fall below expectations.

“Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance-of-payments on a more sustainable footing,” Fitch Sovereign Team Director Philip McNicholas said in a statement.

Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight, and thus adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings, Fitch said.