Govt. says Moody’s failed to recognise SL’s recovery story

From left: Central Bank Governor Prof. W.D. Lakshman, Money, Capital Markets and Public Enterprise Reforms State Minister Ajith Nivard Cabraal and Finance Ministry Secretary S.R. Atygalle at yesterday’s press conference held at Finance Ministry

• Says Moody’s downgrade of Sri Lanka at the beginning of economic revival is inexplicable
• Notes Moody’s failed to recognise and do justice to ground reality of ongoing economic recovery
• According to CB estimates, SL’s trade deficit is expected to be US $ 5.8bn, significantly down from US $ 8bn in 2019.  
• Savings from import restrictions and reduction in oil bill expected to be over US $ 2.0bn
• FDI inflows in 2020 expected to be over US $ 750mn, US $ 400mn less than in 2019
• Fiscal deficit this year expected to be around 9% of GDP; govt. eyes positive economic growth 
• Govt. to start initiatives of alternate bond issuances in Samurai and Panda markets to raise around US $ 500mn
• Govt. expects additional US $ 500mn with recently introduced measures to entice foreign investors to G-Secs
• Budget for 2021 expected to be presented to Parliament on November 17

The government yesterday came up with a strong response against the recent sovereign rating downgrade by Moody’s Investors Service, stressing that the international rating agency had completely ignored the current ground realities and the ongoing economic recovery of the country, after the COVID-19-related lockdowns.

 
On Monday, Moody’s downgraded Sri Lanka’s sovereign rating by unusual two notches to Caa1 (CCC+ equivalent), on deepening fiscal-side constraints, higher foreign debt risks and perceived weaknesses in the country’s institutions and governance. The outlook was changed to stable.

Money, Capital Markets and Public Enterprise Reforms State Minister Ajith Nivard Cabraal said this downgrade by Moody’s had not taken into consideration the recent positive developments in Sri Lanka’s economy.

“Moody’s rating downgrade fails to recognise and do justice to the ground reality of the ongoing rapid economic recovery, backed by vastly improved business confidence, arising from the return of political and policy stability after a lapse of five years,” he said.

Cabraal pointed out that Sri Lanka, like many of its peers in the emerging market group, experienced initial capital outflows, exchange rate depreciation, slowdown in activity and pressure on government finances, in response to the effects of the COVID-19 pandemic. 

But with the successful handling of the crisis situation, the country has moved on to a recovery path of growth and stability. Sri Lanka’s external sector’s performance has improved significantly since May, with export earnings reaching pre-COVID averages of US $ 1 billion a month. 

According to the Central Bank estimations, by end-December 2020, the cumulative trade deficit is expected to be US $ 5.8 billion, significantly down from US $ 8 billion in 2019.  

Also, identifying the vulnerabilities in the country’s external sector, the government decided to put a lid on non-essential imports to preserve the country’s foreign reserves and ensure currency stability, in order to prioritise external debt service obligations.

The savings on the import bill, due to the curtailment of non-essential imports as well as the significant reduction in the fuel import bill, are expected to be over US $ 2.0 billion.

Meanwhile, workers’ remittances to the country have recorded a sharp increase, in spite of the initial expectation of a slowdown and at the current trend, the cumulative decline in workers’ remittances is likely to be marginal, compared to the previous expectation of a decline of 15 percent. 

Although Sri Lanka’s tourism earnings have drastically dropped, due to the restrictions on tourist movements since April, domestic tourism has picked up sharply, due to the airport closures, partly offsetting the impact. Over 600,000 Lankans travel abroad every year for various reasons, including business, health, education and recreational purposes. 

Meanwhile, Cabraal said although FDI inflows have slowed, the country’s investment pipeline is strengthening. The FDI inflows during 2020 are expected to be over US $ 750 million, which is only about US $ 400 million less than in 2019. At the start of the pandemic, FDIs were expected to be only around US $ 300 million for the year 2020.
Further, the country’s stock market, backed by the positivity of local investors, has reached pre-COVID levels and is expected to gather further momentum with end-to-end digitisation of the Colombo Stock Exchange.

Foreign inflows to the government securities market have already shown signs of resumption and according to initial responses, inflows are likely to increase in the coming months, particularly in the wake of the attractive swap arrangement offered by the authorities.

With the government’s increased emphasis on domestic agriculture, agro-based industries and resource-based industries, Cabraal noted that domestic economic activity has seen a remarkable turnaround and recorded a V-shaped recovery.

Sri Lanka’s industrial production has rebounded and electricity generation is steadily normalising, with greater reliance on hydropower generation, showing that domestic economic activity is gathering pace.

Meanwhile, Cabraal noted that Sri Lanka’s exchange rate has appreciated sharply since mid-April and remains stable at appreciated levels, allowing the Central Bank to accumulate reserves through market purchases of foreign exchange.

Foreign inflows, following Moody’s decision, enabled the Central Bank to purchase US $ 30 million from the forex market, on September 29, 2020.

Cabraal said Sri Lanka’s debt-to-GDP ratio, which increased in recent years, is expected to improve over the medium term and by 2025 and the debt stock is envisaged to be brought down to below 70 percent. 

The government is expecting the economy to record a positive growth for this year, although the Central Bank is maintaining a growth forecast of zero percent or below that. The country’s fiscal deficit this year is expected to be around 9 percent of GDP.

Finance Ministry Secretary S.R. Atygalle said the tax revenue received by the government for the month of August was Rs.144 billion. “That means economic activities are happening,” he said.

Meanwhile, Cabraal expressed his surprise over the timing of the rating downgrade, as Sri Lanka is all set to settle the US $ 1 billion international sovereign bond (ISB) on October 4. He said the necessary funds have already been lined up and would be credited to the paying agent’s account on October 2.

He also said financing inflows envisaged for 2020 favours domestic market and strategic foreign financing. Under domestic market financing arrangements, the government expects to raise Rs.1,500 billion in Treasury bonds and bills, US $  550 million (Rs.100 billion) in Sri Lanka Development Bonds (SLDBs), US $ 400 million (Rs.75 billion) in FCBUs and other administrative sources such as the government overdraft.

Financing from foreign sources envisaged for 2020 include multilateral (the World Bank and Asian Development Bank) and bilateral support to the tune of US $ 1.2 billion and a US $ 1.2 billion syndicate loan from the China Development Bank, of which US $ 500 million was already received in March and the US $  700 million tranche is due this month.

Cabraal said the government plans to restart the initiatives of alternate bond issuances in the Samurai and Panda markets, eyeing to raise around US $ 500 million.

With the recently introduced measures to entice foreign investors to the government securities market, the government envisages to raise additional US $ 500 million. Cabraal said already market inquiries are pouring in for sizable investment volumes.  

The government took the receipt of US $ 400 million from a swap arrangement with the Reserve Bank of India (RBI) in August and another US $ 1 billion swap is currently being negotiated with the RBI.

Cabraal also disclosed the ongoing repurchase arrangement with the Federal Reserve Bank of New York, under the government’s liquidity facilitation arrangements.

Sri Lanka’s official foreign reserves were recorded at US $ 7.4 billion by end-August.

In this backdrop, Cabraal said the recent rating action by Moody’s is unwarranted.

“Instead of understanding the economic turnaround as well as awaiting the budget that is due in November 2020, Moody’s downgrade of Sri Lanka at the beginning of the economic revival is inexplicable,” he said.

Cabraal also said the government would commence regular virtual roadshows to strengthen investor relations, following the announcement of the National Budget in November 2020. He said such interactions would provide further clarity on the government’s medium-term fiscal and financing plans as well as keep investors posted on the progress relating to the economic initiatives of the new government.

The government’s budget for 2021 is expected to be presented to Parliament on November 17.