Brexit could trigger balance of payments’ issues for Sri Lanka – Moody’s
View(s):Moody’s, in an assessment of the impact of Brexit on countries in Asia, said the crisis in Europe could trigger balance of payments’ issues for Sri Lanka. In a statement, it said market volatility would affect sovereigns dependent on external financing. “Out of those Asia Pacific countries that have large current account deficits, Mongolia relies in part on private sector financing flows. Mongolia and to a lesser extent Sri Lanka have significant debt repayments due in 2016. In the event that it led to severe and prolonged market volatility, Brexit could heighten balance of payment pressures for these sovereigns,” the report said.
It said there was limited policy space to offset potentially lower external flows in some countries. In Mongolia and Sri Lanka, elevated government debt would constrain fiscal policy room to offset potentially lower growth. “Sri Lanka is also dependent on portfolio inflows to refinance its external debt, albeit to a lesser extent than Mongolia. Funding from the International Monetary Fund (IMF) under an Extended Fund Facility (EFF) and other international lenders, combined with FDI inflows, will relieve pressure on foreign exchange reserves. However, they will not fully cover Sri Lanka’s external financing requirements in the next few years,” it added.
In the region, inflation is somewhat higher in Bangladesh, Papua New Guinea and Sri Lanka, highlighting possible constraints facing those countries’ central banks. Moody’s said in Sri Lanka, government debt increased to 76 per cent of GDP in 2015, significantly higher than similarly rated sovereigns. Under the IMF’s EFF, the government aims to reduce the budget deficit significantly, in particular through higher revenue collection. Tighter financing conditions that hamper GDP growth would make the fiscal consolidation goals more challenging.