Unwarranted downgrading

Fitch Ratings

Sri Lankan authorities are issuing this statement in response to the revision of the outlook on the Sri Lanka's foreign and local currency issuer default ratings to negative from stable, while reaffirming the country's both long-term and short-term default rating. It is clear that the revision is based on the rating agency's pessimistic view on the various measures currently being implemented by the Sri Lankan authorities to raise external financing, and also its pessimistic views on external current account deficit and future economic growth prospects. According to Fitch, the revision reflects the concerns regarding the sovereign's external financial position in light of the decline in reserves.

While it is true that reserves have declined, it should be noted that it is a reflection of the consequences of global financial crises which resulted in a global liquidity crises leading to the drying up credit lines. By now it is well-known that the Central Bank had to provide foreign exchange to meet the demand arising from withdrawal of foreign investment in government securities and payment of large petroleum bills and thereby prevent undue volatility in the foreign exchange market. In fact, reserves had been built up by the Central Bank to face this type of contingent events.

This has not been unique to Sri Lanka and similar decline in reserves has been experienced by many countries.

As admitted by Fitch, the Sri Lankan authorities have taken several measures to boost reserves, which are yielding desired results. Already one central bank has extended a Swap facility and negotiations with two others are at an advanced stage, and expected to be finalised soon. At the same time, Sri Lankans living overseas are positively responding to opportunities offered to invest in government securities and enhanced return on non-resident foreign currency accounts. As a result, we expect substantial investment flows from these measures in the immediate future.

The war on terror is also about to end, and an increased volume of remittances are expected for reconstruction and rehabilitation in newly liberated areas.

Going forward, all these measures are expected to bring in substantial foreign inflows to the country and help build Sri Lanka's official reserves to a very comfortable level before long.

The pessimistic view of Fitch is reflected in its assessment of the current account deficit of the BOP at 4.9% of GDP in 2009 which is considerably higher than the assessment of Sri Lankan Authorities (2.7 per cent) as well as that of the Economic Intelligence Unit which is 2.1 per cent. A significant decline in trade deficit is expected due to sharp decline in commodity prices, in particular petroleum. Therefore, a current account deficit of relatively small magnitude as estimated which is expected to be quite manageable with expected financial inflows, especially, the steady flow of remittances.

In fact, the remittances during 2009 are expected to remain steady in view of the nature of the Sri Lankan migrant workforce and the steps taken by authorities to direct them through official channels.

It is true that the recessionary conditions in advanced countries could have some impact on growth in 2009, but it is unlikely to bring growth down to 3 per cent as projected by Fitch.