S & P affirms B+ sovereign rating on Sri Lanka

Standard and Poor has affirmed Sri Lanka 'B+' sovereign rating with a stable outlook. However, it has warned regarding government debt and weak institutions.

Standard and Poor's credit analyst, Takahira Ogawa in a statement to the media said, "We affirmed 'B+' long-term and 'B' short-term sovereign credit ratings on Sri Lanka. The outlook on the long-term rating is stable.

Our transfer and convertibility assessment remains 'B+'. We also affirmed our 'B+' issue rating on Sri Lanka's outstanding notes".

It said that Sri Lanka's robust growth prospects support the ratings.

Growth drivers include government measures to reconstruct the northern districts, improve finances of public enterprises and limit inflation to single digits.

Sri Lanka's external liquidity remains exposed to international liquidity conditions. Through 2015, we project that Sri Lanka's gross external financing needs will exceed 120% of current account receipts (CAR) plus usable reserves.

We also forecast that the country's external debt - net of official reserves and financial sector external assets will be more than 100% of CAR.

We expect Sri Lanka's gross international reserves to remain at three months' coverage of current account payments in December 2013, a level similar to that in 2012. That's despite decisive action from the government and the Central Bank in early 2012 to improve the country's external position, by allowing the Sri Lankan rupee to depreciate and reining in credit expansion.

Fundamental fiscal weaknesses remain although the government's fiscal metrics have improved over the past three years. We project annual growth in general government debt will be 7.4% of GDP on average for 2013-2016.

We expect net general government debt to decline to 71% of GDP at end of 2015 from 77% of GDP in 2012 because of robust nominal GDP growth and some fiscal consolidation.

We project that the attendant interest burden will comprise more than a third of government revenue through 2015. We also expect inflation to decline gradually this year.

The country's favourable growth prospects are highlighted in our projection that investment will edge up towards 30% of GDP on continued reconstruction and strong public sector investments.

This trend should boost per capita real GDP growth to 6% each year in the next few years from about 5.5% currently.

"The stable outlook reflects our view that the growth prospects for Sri Lanka's per capita real GDP will be more than 5.5% in the next few years and the government's fiscal profile could improve," said Ogawa.

"These strengths are balanced against the country's vulnerable external liquidity and high fiscal and external debt. We also expect Sri Lanka to keep in check the pace of credit expansion and its net external liability position."

We may raise the rating if Sri Lanka's external and fiscal indicators improve more than we currently forecast, given well-designed policy and robust implementation.

Conversely, we may lower the rating if the country's external liquidity deteriorates or if Sri Lanka's growth and revenue prospects fall below our current expectations.

According to the report, by 2015 Sri Lanka's gross external financing needs will top 120 percent of current account receipts (CAR) plus usable reserves and external debt, net of official reserves and financial sector assets will be more than 100 percent of current account receipts. Though the government's fiscal situation has got better, 'fundamental weaknesses' remained. Helped by strong growth, debt to gross domestic product was expected to decline to 71 percent by end 2015 from 77 percent in 2012.