Need to reverse trend - Biz community

by Lalin Fernandopulle and Rohana Jayalal

The business community raising concerns over the recent down rating of Sri Lanka by Fitch, stressed the need to address areas of the economy urgently to reverse the status if the country is to improve its competitive standing in the region.

Tax consultant and Partner Gajma and Company, N.R. Gajendran said at a time the country is going through a transition such a rating is not surprising and added an enabling environment has to be created for investments and driving economic growth.

“There are many external factors such as the Chinese economy slowing down to seven percent growth, the crisis in the Middle East and the recession in Europe. However, we need to market the country with healthy trade agreements such as the Economic Technology Cooperation Agreement (ETCA) with India to boost trade,” he said.

Managing Director and CEO, Chevron Lanka PLC, Kishu Gomes said any internationally accepted rating institution downgrading a country has its own negatives. These are independent ratings any investor would seriously look at when making investment decisions. Therefore, measures should be taken to reverse this status if we are to improve our competitive standing across the region.

Fitch Ratings last week downgraded Sri Lanka’s ratings to B+ Outlook Negative from BB - on account of increasing refinancing risks, growing debts and decline of reserves.

Under the new ratings Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) changed to ‘B+’ from ‘BB-’. A Negative Outlook has been assigned to the IDRs, Fitch said in a statement.

The issue ratings on Sri Lanka’s senior unsecured foreign and local-currency bonds have also been downgraded to ‘B+’ from ‘BB-’. The Country Ceiling is downgraded to ‘B+’ from ‘BB-’ and the Short-Term Foreign-Currency IDR is affirmed at ‘B’.

Several key rating drivers were also given by Fitch to explain the decision. These included increased refinancing risks, significant debt maturities, weaker public finances and a decline in foreign exchange reserves.

However, continued strong macroeconomic growth, positive human development indicators and relative political stability keeps Sri Lanka above some peers, it said.

“The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. The sovereign’s external liquidity position remains strained, reflecting pressure on foreign exchange reserves,” the rating agency said.

Senior banker and financial market analyst Mangala Boyagoda said while there could be a short term impact from the Fitch downgrading which is only one of several international rating agencies, the negative impact on longer term investor and market confidence may be mitigated by Sri Lanka’s robust economic growth plans.

A top corporate personality who wished to remain anonymous said the rating by Fitch is not fair as it seems to show everything is bad in the economy. It is not fair to make a down rating when the there is a conducive environment for doing business.

Managing Director, Sathosa Motors PLC, Tilak Gunasekera said it is not good from the economic view point as it gives wrong signal to the outside world. The government has to be concerned about this and improve the economy substantially.

“We have been deteriorating in our exports and the imports too have reduced substantially.Our balance of payment too has ballooned as a result of the weak economy. The main reason for downgrading is our huge loans which have been obtained from various countries and financial institutions without any strategic plan to re-pay it,” he said.

This has resulted in high cost interest rates which is not possible fora country like ours to manage. In order to overcome these issues and to upgrade the ratings GOSL must have a proper strategic plan for the economy and to reduce the debt burden.

As per the present situation the investors will think twice before coming to invest in SriLanka. Any good investor will come only if that country is financially soundand economically strong. No investors will come in for economically weakcountries who are having huge financial crisis, so that their returns oninvestments will be at a higher risk.

In Fitch’s view, this partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka needing external liquidity support from the IMF and other multilateral institutions. Sri Lanka’s external liquidity ratio, as measured by Fitch at the end of 2015, was 70.9%, which is far below the median of ‘B’- rated peers’ of 171.9% and the ‘BB’ median of 152.4%.

Economist and business analyst, Prof. Vajira Ekanayake said, “As financial experts and economists we disagree on the significance of the downgrade. There will be little impact on the economy and that markets will stabilise and interest rates will remain fairly steady. Sri Lanka is still an economic powerhouse despite its current problems,

Second, the downgrade will impact trade flows to Sri Lanka. Among other sectors, the services sector that constitutes a majority of Sri Lankan’s exports, will be most impacted. It may experience a dent in demand.

“Some economists and financial experts believe the downgrade will have a significant negative impact on Sri Lanka,” he said.

Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran said, “The downgrading will not have any impact on the country’s borrowing.”

There are three ways the fall out from the Fitch decision may hinder Sri Lanka’s economy:

First, volatility in global markets will affect Sri Lanka’s equity markets.

Second, the downgrade will be impact trade flows to Sri Lanka.

Third, there is already an adverse impact on capital flows to Sri Lanka. A foreign institutional investor (FII) will pull out. In such a climate, foreign direct investments (FDIs) into Sri Lanka will also slow down, especially investment in infrastructure where the FDI is needed most.where it creates substantive employment opportunities.

The domestic inflationary environment and political paralysis will exacerbate the situation. Sri Lanka’s usual The inflation rate in Sri Lanka was recorded at 2.70 percent in February 2016. The Inflation Rate in Sri Lanka averaged 9.85 percent from 1986 until the 2016 rate of growth was dampened this year by extreme inflation and just came in at 2.70% for February, the first quarter 2016.

Sri Lanka’s macroeconomic performance remains stronger than some of its peers’ in the ‘B’ and ‘BB’ range with real GDP growth for the five-year period ending 2015 averaging close to 6%, compared with the ‘B’ median of 4.6% and ‘BB’ median of 3.9%. Sri Lanka also continues to score highly, compared with the ‘B’ median, on basic human development indicators, such as education, health and literacy, which is indicated by its favourable ranking in the UN’s Human Development Index. These relative structural strengths, combined with a clean external debt service record and smooth transition of power during the presidential and parliamentary elections in 2015 indicates a basic level of political stability, which supports the rating at ‘B+’.

To combat inflation, the government will have to take deflationary steps such as interest rate hikes. However, high interest rates combined with slow economic growth in Sri Lanka.

On the other hand this may be the Negative Outlook which reflects the following risk factors that could, individually or collectively, result in a downgrade of the ratings:

A further increase in external vulnerability driven by a sustained decline in Forex (FX) reserves reflect, for instance, reduced international market access and or a sudden reversal in portfolio inflows.

A further deterioration in policy coherence and credibility widens macroeconomic imbalances and or heightens external vulnerabilities.Continued fiscal slippage results in a failure to stabilise the general government debt ratio.