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In a report issued today, Moody's Investors Service says that Sri Lanka's B1 government bond rating is supported by its record of strong growth, but constrained by high government debt ratios.
The rating agency's report elaborates on Sri Lanka's credit profile in terms of Economic Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk, which are the four main analytic factors in Moody's Sovereign Bond Rating Methodology. The credit analysis report is an update to the markets and does not constitute a rating action.
Since the end of its 27 year long civil war in 2009, Sri Lanka's economy has reaped a peace dividend in the form of GDP growth averaging around 7.5% annually and strong inflows of both foreign direct and portfolio investment. Although growth has slowed in recent quarters, Moody's expects average growth to continue to compare favorably to peers over the rating horizon.
However, Sri Lanka's sovereign credit profile faces challenges posed by Sri Lanka's government debt ratios, which, even though they have declined over the last decade, remain higher than the median for similarly rated peers. Consequently, interest payments consume almost a third of government revenues, and limit the fiscal flexibility to increase spending on infrastructure or to introduce fiscal measures to offset a slowdown in growth.
Moreover, as a relatively small economy with a current account deficit, Sri Lanka is exposed to uncertain global growth and financial conditions in coming months, although the risks of this exposure are somewhat mitigated by the balance of payments benefits of lower oil prices. Lower oil prices have also helped subdue inflation, which was higher and more volatile than peers in past years.
The rating outlook is stable, incorporating Moody's expectation that the ongoing growth slowdown and political uncertainty around the August parliamentary elections is unlikely to lead to medium term credit deterioration.
The outlook could improve if Sri Lanka's government debt and interest payment ratios were to stabilize at considerably lower than current levels.
On the other hand, a reversal of policy efforts to maintain macro-economic balance, lower fiscal deficits and improve the investment climate would likely lead to downward pressure on the rating outlook.
