Weaker remittances from Gulf countries will lower Sri Lanka’s credit rating: Moody’s

Lower remittances from oil-rich Gulf countries, which have been hit hard by the slump in oil prices, will reduce the benefits of cheaper oil imports for several Asia Pacific countries including Sri Lanka, Moody’s Investors Service says.

In a new report titled ‘Sovereigns – Asia Pacific: Falling Remittances from the Gulf Dampen Benefits of Lower Oil Prices,’ the global rating agency says generally, weaker remittances will immediately impact the recipient countries’ credit profiles via their balance of payment positions.

A prolonged fall would also hurt economic growth, given the importance of remittances to household incomes.

The Moody’s report analyses the potential credit implications of weaker remittances from their citizens working abroad for six Asian countries including Sri Lanka (B1 stable).

The report finds that while previous oil price shocks had limited and short-lived effects on remittances to Asian countries, the current more pronounced and prolonged decline – coupled with fiscal tightening in many oil-exporting countries – is likely to hurt migrant worker earnings and consequently remittances.

In Sri Lanka, the growth of remittances slowed from 9.6% in the previous year to 0.5% in 2015 and remittance flows are projected to grow less than GDP this year. However, the workers’ remittances recorded an increase of 8.0% during January-February 2016.

“The challenging global environment has taken a toll on the economy with reduced exports and remittances; and significant capital outflows, leaving Sri Lanka with higher public debt, lower reserves and rising inflation,” a World Bank Report on South Asia said recently.

For most of the countries in Moody’s study, remittances inflows are greater than net oil import payments as a percentage to GDP. However, the 25% decline in oil prices since the start of 2015 is large, and Moody’s expects the declines in remittances to be much lower than that in percentage terms. Therefore, the agency says, unless remittances fall significantly more than it expects, their decline will dampen, but not completely offset, the benefits of lower oil prices for the current account.

Moody’s report finds that in sovereigns that are already facing external pressures, or where growth is weakening or anemic, a slowdown in remittances will exacerbate such challenges. Sri Lanka stands out in this regard, due to its large financing needs and thin foreign reserve cushion, while Bangladesh and Pakistan face similar challenges to a lesser degree.