• S&P cites new Tax Act, reforms and prudent liability management as key reasons
• But says higher rating may not materialise over next 12 months
• Says structural measures needed to address external vulnerabilities over the long run
• Notes SL’s debt servicing is third worst among sovereigns it rates

Ranil Wickremesinghe - Pic by Pradeep Pathirana 

By Chandeepa Wettasinghe

Prime Minister Ranil Wickremesinghe on Monday night hailed the upward revision of Sri Lanka’s credit outlook to ‘Stable’ from ‘Negative’ by the international credit rating agency Standard and Poor’s (S&P) and the affirmation of ‘B+/B’ rating.

Wickremesinghe said the outlook revision was a testament to the commitment of the government towards economic reform and 
debt management.

“I just received the S&P ratings and we have gone from negative to stable because we are keeping the reform momentum and tackling the debt redemption spike, (which is) a very difficult task. So, to have a B+/B stable rating is not bad,” Wickremesinghe told a packed house of the country’s top private sector business representatives at the ‘Business Today Top 30’ awards ceremony, last evening.

S&P had taken the passing of the Inland Revenue Act and the commitment for sustained reforms over the next 12-18 months, including the commitment to pass the Liability Management Act, to proactively manage the future debt maturities as the main reasons for the change in outlook. 

While S&P said that a higher rating may not materialise over the next 12 months, upward pressure could mount if the country’s external and fiscal sectors show dramatic improvement, if the government institutions improve and if the monetary policy credibility and independence of the Central Bank built up recently, continue 
to strengthen.

 “Although we believe the reform momentum is improving, we continue to observe significant challenges to the policymaking environment, owing to legacy institutional constraints and a fragmented political landscape,” S&P said. 

The rating agency cautioned that downward pressure on the rating could materialize if the political environment were to become more fractious, derailing the legislative programme—especially its liability management reform.

While S&P acknowledged that the government’s external liquidity and debt ratios have stabilized, the rating agency said the expectation of the rupee to gradually depreciate and the fact that 40 percent of government debt is in foreign currency, create risks, noting that the government’s contingency liability level is limited. 

“External liquidity support from the IMF has eased near-term pressures but structural measures will be needed to address Sri Lanka’s external vulnerabilities over the long run. Although these risks could be further mitigated by allowing the Sri Lankan rupee to float more freely, it would worsen Sri Lanka’s external debt metrics,” S&P said. 

The rating agency said that Sri Lanka’s debt to GDP is expected to fall to 72 percent by 2020 over fiscal consolidation commitments. 

“At the same time, we expect only slow progress in reducing debt servicing costs and we estimate that general government interest expenditures will account for more than 36 percent of government revenue in 2017.”

S&P said that Sri Lanka’s debt servicing is the third worst among sovereigns it rates, after Lebanon and Egypt. 

Meanwhile, the ratings agency said that inflation is expected to remain moderate at single digits, while the real gross domestic product is expected to grow at 4.9 percent till 2020 based strongly on tourism, apparel and business process outsourcing.