Sri Lanka outlook lowered to negative by Fitch, B+ rating affirmed

Feb 27, 2009 (LBO) - Fitch Ratings has lowered Sri Lanka's long-term foreign currency sovereign credit outlook to negative from stable while confirming its rating at 'B+' and short-term rating at 'B'. In 2009, Fitch forecasts the trade deficit will fall to 3.5 billion dollars and the current account will decline to 2.1 billion dollars, equivalent to 4.9 percent of forecast GDP.

"In Fitch's view, without a sharp contraction in domestic demand to curtail imports, or a significant depreciation of the exchange rate to otherwise correct the trade imbalance, Sri Lanka may not have access to sufficient international funding to cover the current account shortfall and its international debt repayments, resulting in ongoing pressures on official reserves," McCormack said.

Fitch said at end-2008, Sri Lanka's reserves covered just 1.3 months of current external payments (including all debit items in the current account of the balance of payments), one of the lowest coverage ratios of any emerging market.

Fitch noted that the Central Bank of Sri Lanka has initiated various measures to bolster capital inflows and official reserves.

These include bilateral swaps with other central banks, a furthe