In a better mood...

Moody’s Investors Services, controlled by New York Stock Exchange listed Moody’s Cooperation, yesterday assigned the government of Sri Lanka a B1 foreign currency issuer rating with a stable outlook.

"The stable outlook on the B1 foreign currency sovereign rating encapsulates our expectation that the re-integration of the northern and eastern regions into Sri Lanka’s economy will sustain a higher growth rate with single-digit inflation without destabilizing the external current account position. The outlook also reflects considerable scope for fiscal reforms and high likelihood of foreign investment inflows against lingering risks posed by a large government debt overhang and remaining, though, diminishing, external financing risks," said Aninda Mitra, a Moody’s Vice President and lead sovereign analyst for Sri Lanka, in statement issued yesterday.

"The stable outlook also considers Sri Lanka’s small size, partial dollarization, and relatively modest gross domestic savings. We therefore place more forward-looking credit emphasis on an improvement in fiscal management, which is an area where reforms are planned, but a track record is awaited," she said.

Moody’s Investors Services said the rating was based on four key methodological factors:

• Low economic strength: derived from a small, relatively open and lower-middle income economy, which has grown appreciably despite the long civil war and several external shocks. A sustained track record of rapid economic growth with reasonable external balance and restrained inflation which, coupled with further diversification of the economic base, could support an improved assessment of the country’s economic strength.

• Medium institutional strength: supported chiefly by reasonably strong monetary management through the long civil war, strategic policy reforms and initiatives undertaken during the conflict, and a strong relationship with official creditors and key bilateral partners. This sets the stage for a sustained rebound in the economy. Moody’s assessment also incorporates the World Bank’s moderate rankings for Sri Lanka for rule of law and government effectiveness. The development of contractual savings, institutions and fairly broad domestic financial markets have helped to accommodate the sovereign’s large fiscal financing needs.

• Low government financial strength: reflects the government’s large debt and debt service burden, and lingering external vulnerabilities, which Moody’s recognizes as being largely due to wartime circumstances. However, these risks are being offset by growing foreign investor interest and improvement in domestic competitiveness, which should support the balance of payments position. There are also proposed fiscal reforms which are expected to lower future budget deficits. Moreover, the country’s improving growth prospects and a downshift in local interest rates will also support the government’s debt dynamics.

• Medium susceptibility to event risk: reflects the resilience of Sri Lanka’s constitutional democracy, which has withstood a prolonged civil conflict that has left its core policy institutions and resident confidence un-damaged. However, financial and contingent liability risks, relative to the sovereign’s strained balance sheet and lingering external financing risks, are still considered as constraints, although these may ease over time.

Moody’s Investors Services said an improvement in the government’s fiscal and debt positions, lower and less volatile inflation and sustainable improvements in foreign currency reserves adequacy, supported by larger foreign direct investment inflows could lead to an improvement in ratings.

"Failure to progress on fiscal consolidation, or a loss of inflation control, and a sustainable worsening of the country’s external balance and foreign currency liquidity position could bring ratings down," Moody’s said, adding that a reversal on recently achieved political stability could adversely impact resident and foreign investor confidence.


source - www.island.lk