Bond issue gets favourable rating despite debt problems

18 July 2012 05:38 am Views - 3542

The proposed US$ 1 billion bond issue by Sri Lanka has been rated positive by three global rating agencies, in line with the country’s sovereign rating, though not failing to cite the challenges the country’s economy is facing, stemming from high external debts it is burdened with.

Accordingly, Standard & Poor’s (S&P) assigned ‘B+’ for the bond issue while Moody’s gave a provisional currency rating of B1. Fitch Rating has rated the bond issue at ‘BB-‘.Central Bank of Sri Lanka earlier announced that Bank of America Merryll Lynch, Citi, Barclays and HSBC had been selected as lead managers to the bond sale. State-controlled People’s Bank was chosen a co-lead manager. The bond issue is scheduled to mature in 2022.

Both Moody’s and S&P cited the country’s greater macroeconomic and financial stability along with the government’s policy orientation around fiscal reform and economic growth, support from the IMF, an improving external payment position and the overall reduction in political event risk following the end of the war, as part of its rationale behind the ratings. “The main challenge facing the government is the reduction of its large debt overhang and the consequently large debt servicing costs. However, Sri Lanka is well-placed to grow out of its debt, given its robust outlook for economic growth,” the Moody’s report stated.

It added that despite notable progress towards the re-integration of the population of the war-torn North and East, the fact that political reconciliation is still considered to be at an early stage meant that Moody’s would maintain their event risk at a “somewhat elevated” level.

The rating report further stated that their ratings would be affected in future by continued deficit reduction coupled with effective containment of inflation amidst sustained high rates of growth, meaning that the government would have to consistently maintain its current policy of fiscal consolidation.

In its report on the proposed bond issue, S&P also cited positive developments leading to favorable growth prospects as being responsible for the B+ ratings. However, the agency also noted that the rating was constrained by a weak external liquidity position, alongside increasing external debt and “fundamental fiscal weakness” and a high public debt and interest burden.

Ratings were further constrained by some cases of a lack of transparency and independence in some political institutions, according to S&P.

The report added that any substantial deterioration in the country’s external liquidity, or growth and revenue prospects, would result in a lower rating.