Watchful Fitch hopeful

By Shehana Dain

In the backdrop of Sri Lanka successfully securing the $ 1.5 billion IMF cash support last week, Fitch Ratings yesterday told the media that the agency is closely monitoring how the economy adjusts under the IMF program and will consider a fresh review if reforms materialise.

Noting that adjustment of any sort would challenge Sovereigns Ratings, Associate Director Sagarika Chandra said that from a rating point of view the Sri Lankan Government should reverse its hasty policy making and revert to a predictable platform.   

 “The Government has said that they would like to raise Government revenue by raising taxes but then the question is how you grow along with that.We think from a rating stand point some of the key drivers of Sri Lanka’s ratings are really progress on the IMF program and a certain degree of predictability with policies, because in the past we have seen that predictability has been a weakness. The real challenge is meeting the IMF criterion that’s something we are still waiting to see,”she said.

Chandra highlighted that Fitch expects the IMF program to give some leverage to the policy making process, nonetheless at the same time she stressed that on the external front there are some glaring near term external financing needs. “The external liquidity condition is weak, thus the buffers are weakening in that sense. USA interests rates are going to go up we expect it to happen and carrying on to the next year. In that environment with a higher US dollar globally it’s going to be hard for countries to meet their external financing needs. In 2016 Sri Lanka’s external financing need is growing rather than shrinking, the situation looks riskier,” she added.

In March this year Fitch Ratings downgraded Sri Lanka’s sovereign credit rating to ‘B+’ from ‘BB-’ and assigned a negative outlook.

“We downgraded because we saw that the stresses in the external front were quite severe having said that, with the IMF program probably now there is some investor confidence for a certain degree but we still see that progress with respect to the IMF program will be really the key to Sri Lanka’s sovereign rating going forward,” Chandra said.

Pointing out that Fitch sees a positive outlook for Sri Lanka in the medium term however she said that no real change has taken place in the economic and policy making landscape since the downgrade. “We do reviews annually and therefore our next review will be in February 2017. Nevertheless we can do a review before that if we see that events have changed drastically. It’s a little too early given that the we haven’t seen a lot from the authorities yet to comment on the policy outlook.”

Fitch Ratings Asia Pacific Sovereign Ratings Head Andrew Colquhoun also reiterated that there have been few tweaks made by the Government that points towards a progressive position.

“It kind of has been a game in two halves actually so far. Last year from a credit and sustainability perspective we saw the calibre of quality policy making deteriorating. We also had lose monetary policy, rapid credit growth and large increase in public sector wages which substantially increased fiscal deficit. This year we have had a rise in the VAT rate and monetary tightening as well so policy has reversed course this year to a more sustainable direction which is positive.”

Additionally Corporate Ratings Group Head of Asia Pacific Andrew Steel said that the Government’s increasing interest on Public Private Partnerships (PPPs) is commendable however warned that authorities are yet to realise its complexity to drive forward.

 “There’s a lot of talk in Sri Lanka about PPPs to facilitate infrastructure projects. The one thing about PPP is people often talk about them very broadly and easily as a remedy for not having funding available and to bring the private sector in however it’s really complex to put in place and the risk allocation is extremely detailed. Thus investors in that type of product expect to see a lot of clarity and a lot of detail and therefore you need to fix that in the form of legislation and reform before you try to embark on that process. Otherwise you stir up a lot of interest but you won’t get too much that actually crystallizes,” he noted.