Fitch casts doubts over govt.’s ability to achieve ambitious fiscal targets

Echoing similar sentiments to that of Moody’s, Fitch Ratings Limited expressed doubts over the government’s ambitious fiscal consolidation agenda, which targets to shrink the budget deficit to 4.4 percent of GDP this year, from 5.3 percent in 2018. 

“Hitting these targets will be challenging as it will require sharper deficit reduction over the next two years than we had expected and would be more aggressive compared with the government’s 2018 budget,” wrote Fitch Ratings Associate Director Asia Pacific Sovereigns Sagarika Chandra. 

Fitch recognized the deal reached between the Sri Lankan government and International Monetary Fund for a programme extension and last week’s budget as steps towards restoring policy certainty, after the disruptions caused by the political upheaval in the final weeks of 2018. 

But the rating agency did not discount the risks stemming from the elections schedule towards the latter part of 2019, which can have spillover effects on the fiscal projections. 

“There remain risks to the government’s fiscal projections, which would rise if the approach of presidential election due by end-2019 triggers renewed political tensions,” Chandra added. 

Despite its share of excesses, Budget 2019 is a bold policy document by the United National Party-led government, as it had been designed in a way it narrowly escaped from being labelled as an election-oriented budget.   

After many years, Budget 2019 managed to build a consensus among a wider section of society by frankly recognizing the issues facing the economy and proposed short and medium-term policies to address the same. 

Fitch Ratings joined the bandwagon of other rating agencies in December to cut Sri Lanka’s sovereign rating to B from B+ to reflect the exacerbated external refinancing risks, uncertain policy outlook and risk of a slowdown in fiscal consolidation, following President Sirisena’s sudden decision to replace the prime minister in October, which sparked a political crisis.

“The government has reinforced its commitment to a medium-term debt management strategy and we still expect the deficit and government debt ratios to continue declining. Nevertheless, fiscal finances will remain a key weakness in Sri Lanka’s credit profile. 

General government debt is around 84 percent of GDP in 2018, according to the provisional numbers provided by authorities, which is well above the 65.4 percent median for sovereigns rated ‘B’ or lower. Moreover, nearly half of government debt is in foreign currency, which makes debt projections sensitive to currency movements. The depreciation of the rupee against the US dollar is likely to have held back debt reduction in 2018.For example, Sri Lanka’s external liquidity position also remains weak as the sovereign’s foreign currency-denominated debt payments between 2019-2022 amount to US $ 20.9 billion, compared with foreign-exchange reserves of just US $ 6.2 billion at end-January,” Fitch said.