Fitch affirms Sri Lanka at 'BB-' outlook stable

Fitch Ratings has affirmed Sri Lanka's Foreign- and Local-Currency IDRs at 'BB-.The outlook for both ratings are stable. The Country Ceiling has also been affirmed at 'BB-', and the Short-Term Foreign Currency IDR at 'B'.

"The ratings reflect Fitch's view that the authorities have taken measures to correct recent pressure on the balance of payments and place it on a more sustainable trajectory," said Director in Fitch's Asia-Pacific Sovereign Ratings group.

Philip McNicholas said "Given the weakened state of Sri Lanka's external finances and a heavy external debt refinancing schedule through to 2013, the authorities' ability to persist with policies that address existing macroeconomic imbalances and improving external liquidity is crucial, he said.

"Although Sri Lanka recorded real GDP growth of over 8 percent for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8 percent of GDP from 2.2 percent in 2010.

This, together with the deteriorating external economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD 5.8bn (3.4 months of imports) in January 2012 from USD 8.1bn (equivalent to 5.7 months of imports) in July 2011.

The pace of deterioration in external buffers, rather than their level, is Fitch's main focus.