Sri Lanka’s debt higher than B, BB rated countries, Fitch data shows

June 21, 2016 (LBO) - Sri Lanka’s current debt levels are higher than its ‘B’ median peers or the previously rated ‘BB’ median, data from the ratings agency Fitch shows. Sri Lanka’s external funding requirement too is high compared to peers, although it performs better in certain governance metrics and HDI indices. Supporting the rating, however, Sri Lanka has the potential to receive higher FDI due to the ease of doing business. These points were discussed at the Sovereign and Corporate Forum organized by Fitch last week in Colombo, with international and local experts attending. Sri Lanka formerly rated at BB- shared the rating with peers such as Bangladesh and Vietnam. However, the country rating was downgraded to B+/Negative in early 2016. A snapshot of how Sri Lanka stands with others in the region in terms of external liquidity and leverage is given in the chart. The island is currently facing a larger number of debt maturities and some believe Sri Lanka’s external borrowings could become more expensive. Associate Director APAC sovereign ratings, Sagarika Chandra of Fitch Ratings, discussed what to expect once the IMF funding program is put in place. Prior to the IMF funding program hikes in rates lead to a decline in credit growth. But this is expected to pick up post IMF fund, with a lower interest rates, although it would gradually slow down. Sri Lanka’s budget deficit is higher than its rated ‘B’ median, but Chandra expects this to increase savings in future gradually reducing the overhanging debt levels. Sri Lanka’s generally favourable GDP growth could slow, but remittance inflows continue at a steady pace along with tourism. Senior Director and Head of APAC sovereign ratings, Andrew Colquhoun, said Emerging Asia remains the world’s fastest growing region but with unique exposure to China, while also being influenced by the Fed. “Emerging Asia is hence caught between China and the Fed,” he said. External factors such as less favourable oil prices and Fed rate hikes are risks to Sri Lanka’s external position. Sri Lanka’s exports which were two billion dollars in 1990 have increased only to 11 billion dollars as of today, while Vietnam which had lower exports than Sri Lanka in 1990 currently has exports of 100 billion dollars, a panelist pointed out. In terms of the corporate debt market, panelist Malinga Arsakularatne described how Hemas Holdings PLC had benefited from a rating by an international rating agency such as Fitch Ratings, as it was a learning process that benefited Hemas both directly and indirectly. Arsakularatne also stated that there are 3 large corporates in Sri Lanka that hold better ratings than local banks, who do not raise debentures, whether for lack of awareness or cultural barriers was left to be debated.