"The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs," Moody's said.
"However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.
"Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage.
"As such, Moody's assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework."
The full statement is reproduced below:
Moody's assigns a provisional rating of (P)B1 with positive outlook to Sri Lanka's proposed global bond
Singapore, July 17, 2012 -- Moody's has assigned a provisional foreign currency rating of (P)B1 with a positive outlook to the government of Sri Lanka's proposed U.S. dollar-denominated global bond.
RATINGS RATIONALE
Sri Lanka's B1 sovereign rating reflects Moody's Investors Service' methodological assessment of the country's low economic and government financial strengths, moderate institutional strength, and a moderate susceptibility to event risks.
The outlook for the sovereign rating was changed to positive in 2011, reflecting an increasingly evident peace dividend reflected in greater macroeconomic stability, as well as a policy orientation of fiscal reform and economic growth that continues to be guided by an IMF program. In addition, the monetary authorities have established a regulatory and supervisory framework supportive of financial stability.
Robust growth momentum carried into 2012 with real GDP growing by 7.
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9%
year-on-year in the first quarter. However, pressures on the balance of
payments that had built up since mid-2011 prompted macroeconomic policy
tightening starting in February 2012 to temper widening trade balances
and declining foreign exchange reserves.
The external payments position has stabilized, although greater exchange rate flexibility may be reflected in higher inflation in the near-term. The growth outlook has also moderated somewhat, but trend fiscal consolidation remains intact with both the budget deficit and stock of debt continuing to fall as a percentage of GDP.
The rating continues to be encumbered by the reduction of its large debt overhang and the consequently large debt servicing costs. However, Sri Lanka is well-placed to grow out of its debt given its still-favorable outlook for economic growth, while the government has taken measures, such as recent tax reforms, to further strengthen its financial position.
Another concern is the re-integration of the Tamil minority in the war-torn northeast region. Although there has been notable progress, we consider that the process of political reconciliation is at an early stage. As such, Moody's assessment of event risk remains somewhat elevated, but at a moderate level in our global bond methodology framework.