Fiscal consolidation to stall: Fitch

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Fitch Ratings, which this week affirmed Sri Lanka’s Long-Term Foreign and Local Currency Issuer Default Ratings at ‘BB-’, says it believes fiscal consolidation could stall in 2015-16 as expenditure rises and revenues remain lackluster. Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation by the creation of strategies for minimizing deficits and preventing the accumulation of more debt.

“Public finances remain a credit weakness. Sri Lanka’s fiscal metrics are a standout relative to the ‘BB’ category, notwithstanding a reduction in general government deficits to around 5% in 2014 from 8% of GDP in 2010. Narrower government deficits have contributed to a fall in public debt, despite a weaker Sri Lanka rupee, which drives up the local currency component of external public debt. Still, gross general government debt remains high at about 75% of GDP at end-2014 and Fitch believes that fiscal consolidation could stall in 2015-16 as expenditure rises and revenues remain lackluster,” the rating agency said in a statement adding that the interim 2015 budget contained a number of one-off measures that have hurt business confidence and did little to address the lack of a medium-term fiscal framework.

Fitch also noted that with low foreign direct investment, Sri Lanka’s economic growth is heavily dependent on external borrowing, while the government’s “pro-growth” bias has constrained improvements in Sri Lanka’s fiscal and current account deficits and weakened policy coherence and credibility.
“Recent monetary easing and continued strong credit growth lend further support to this view,” the statement pointed out.

 The issue ratings on Sri Lanka’s senior unsecured foreign and local currency bonds are also affirmed at ‘BB-’. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘BB-’ and the Short-Term Foreign Currency IDR at ‘B’.

Commenting on the External Borrowing Strategy, Fitch said it expects that Sri Lanka will succeed in rebuilding international reserves to US$ 10 billion by the end of 2015 through a combination of renewed borrowing on international capital markets, the exercise of foreign currency swaps with the Indian and Chinese central banks, and onshore borrowing through Sri Lanka Development Bonds.

“Nonetheless, there are risks that may derail this strategy, including a potential rise in domestic political uncertainty and an adverse shift in investor sentiment, which led Sri Lanka to abort plans to borrow in international capital markets in 1Q15,” Fitch said.

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