Moody’s affirms Sri Lanka’s B1 rating; maintains negative outlook

• Largely due to high risks in government liquidity and volatile external front
• Weaker revenue and external sector outweigh fiscal improvements by way of strong tax policies 
• Measures to build reserves and smooth the profile of external payments may be insufficient

Ratings agency Moody’s Investors Service (Moody’s) this week said that it would maintain the B1 negative outlook for Sri Lanka due to the high risks in government liquidity and volatile external front.

“The decision to affirm the B1 rating balances Sri Lanka’s moderate institutional strength and an economy which exhibits strong, if somewhat volatile, growth and reasonable levels of wealth; against a high debt burden, narrow revenue base, large government borrowing requirements and elevated external vulnerability risk,” the ratings agency said.

Moody’s gave the negative outlook in June 2016 over expectations of further weakening in government finances and a potential shortfall in the effectiveness in fiscal reform. “However, this expectation of fiscal weakening has not materialized and the government has an advanced important tax policy and administration reforms that have contributed to gradual fiscal improvements,” 

Moody’s said. Yet, weaker revenue and external vulnerability risks outweigh that, the ratings agency noted.

“Specifically, measures to build reserves and smooth the profile of external payments may be insufficient to stem imminent government liquidity and balance of payments pressures starting in 2019, when large international debt repayments come due and Sri Lanka’s three-year International Monetary Fund (IMF) Extended Fund Facility (EFF) programme concludes,” Moody’s said. The ratings agency said that after the completion of the sale of the Hambantota port, which would raise the country’s foreign reserves to US $ 7.5 billion in 2018, compared to US $ 6.5 billion this October, reserves are not expected to rise further, which would increase the external vulnerabilities during the 2019-2022 large foreign debt maturity period.