SL among nations most vulnerable to shifts in external financing conditions: Moody’s

• Warns further political tension could spark capital outflows, raise the country’s risk premia
• Says budgetary consolidation path would be slow amid continued political tensions 

Sri Lanka is among one of four Asian countries most vulnerable to shifts in external financing conditions due to its high debt repayment schedule and low reserve position, said international rating agency, Moody’s Investors Service.

Renewing its stand, Moody’s warned that further political tension could spark capital outflows and raise the country’s risk premia, exacerbating tight financing conditions. Moody’s cut  Sri Lanka’s sovereign rating in November, last year, to B2 from B1 with a change in the outlook to ‘Stable’ from ‘Negative’ over the increased debt refinance risks caused by the political crisis, raising uncertainty over the country’s ability to carry out fiscal and other structural reforms. 

“Foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka threatening the ability of these governments to refinance debt and fund deficits affordably. 

Foreign exchange reserves have declined owing to persistent current account deficits, which have widened over the past two years”, said Moody’s in its latest report on Asia-Pacific sovereign outlook in 2019.

Moody’s External Vulnerability Indicator (EVI) reading for both countries exceeds 160 percent for 2019, which indicates that the total public and private external debt of the two countries over the next year is larger than the foreign exchange reserves.

Sri Lanka’s external foreign exchange reserves dwindled during 2018 and ended the year slightly below US $ 7.0 billion, roughly to cover three months of imports.  
Sri Lanka has to retire on average US $ 4.0 billion per annum in external debt over the next five years. 

“The reserves coverage of imports has also fallen, particularly in Pakistan, where reserves are now worth less than two months of goods and services imports. 
Tighter global funding conditions resulting in higher credit risk premia and/or domestic interest rates would quickly transmit to government finances in both countries – where debt affordability is already weak – owing to large gross borrowing requirements”, the rating agency added. 

The global rating agency also expects Sri Lanka’s debt burden to remain higher for longer as they expect the budgetary consolidation path to become slow amid continued political tensions and its resulting disruption to fiscal and economic policymaking.

Sri Lanka targets a budget deficit of 4.8 percent in 2019 from an earlier target of 3.5 percent. 

Meanwhile, Moody’s expects Asia’s emerging and frontier markets to experience the sharpest deceleration in growth in 2019/20 with the median GDP growth rates of 5.5 percent and 5.2 percent, respectively, weaker than its estimates for 2018. 

The tension between the U.S. and China over bilateral trade could undermine the investments and weigh on growth potential, Moody’s said.

Earlier this week, World Bank placed Sri Lanka’s economic growth at 4.0 percent in 2019, below the projected growth for the South Asian region. 

Meanwhile, the growth in advanced economies is expected to slow to 2.5 percent. 

Moody’s overall credit outlook for Asia Pacific is ‘Stable’. Solid domestic fundamentals, including rising incomes and competitiveness, generally ample foreign exchange reserves and often sizeable domestic savings will continue to underpin government credit quality. 

The rating agency said shifts in domestic priorities away from fiscal consolidation, or in political appetite to address weaknesses in the financial sector pose a risk to some emerging and frontier market sovereign credit profiles.  (NF)