Fitch Ratings said on Wednesday it has affirmed Sri Lanka’s Long Term Issuer Default Ratings (IDRs) at ‘B+’ and has revised the Outlooks on both ratings to Positive from Stable, saying it sees GDP growth reaching 7.2% in 2010-2012.
The revised rating, it said in a statement, is largely to reflect the economic benefits of post-war transformation and IMF support. Both Outlooks were changed to Stable from Negative in October 2009 on account of the end of the 26-year civil war and the approval of a $2.6 billion IMF Stand By Arrangement (SBA).
“In particular, the authorities have made headway in integrating the war-torn Northern and Eastern Provinces into the rest of the economy, which will boost Sri Lanka’s productive capacity. Fitch is forecasting real GDP growth to average 7.2% in 2010-2012 compared with an average of 5.1% in the previous 20 years,” it said.
Fitch said IMF support has lifted investor confidence that Sri Lanka’s macroeconomic policy framework will be tightened up. This has led to a pick8208]up in private capital inflows into the country and, in turn, a rise in foreign exchange reserves. Fitch said it sees more evidence that the Central Bank has shifted the focus of monetary policy to fighting inflation from supporting growth.
“The authorities also appear ready to tackle the sovereign’s biggest ratings constraint, weak public finances. The country’s poor record of fiscal discipline is highlighted by both the budget deficit of 9.9% of GDP in 2009 and public debt of 86.2% of GDP, both well above the medians for the ‘B’ rating peer group. The end of the war provides the authorities flexibility to cut defence spending, which has typically accounted for over 15% of government expenditure. Equally vital, the formation of the Presidential Commission on Taxation last year signals that the authorities intend to reform tax policy.
The government revenue/GDP ratio stood at 15% of GDP in 2009, which is well below the ‘B’ median,” it said.
Fitch said the Presidential Commission on Taxation is set to release its final recommendations before November 2010 and points out that though this is too late to help address the 2010 budget deficit target of 8.0% of GDP, new tax measures will be crucia in determining whether the authorities can ultimately meet their budget deficit targets of 6.8% of GDP for 2011 and 5.2% for 2012.
It said another key challenge facing Sri Lanka relates to its external finances, as net external debt reached 31.1% of GDP in 2009, placing it well above the ‘B’median. The ability to attract non8208]debt capital, namely foreign direct investment (FDI), would not only help on this front but could also improve the overall competitiveness of the economy. This could help stem concern over Sri Lanka’s export sector arising from its loss in August 2010 of reduced tariff rates through the GSP Plus facility with the European Union.
Fitch said if the rating is to be upgraded, Sri Lankan authorities need to boost the tax revenue base while consolidating the budget deficit and significantly lowering the level of overall public debt.