Sri Lanka’s sovereign rating ‘negative’ outlook could be upgraded if budgets improve: Fitch

April 23, 2007 (LBO) – The 'negative' outlook on Sri Lanka's BB- rating could be upgraded to 'stable' if Sri Lanka could produce better budgets, reduce inflation and show that the conflict's effect on the country's ability to repay debt had lessened, Fitch Ratings has said. The rating agency Monday affirmed Sri Lanka's sovereign rating (Issuer Default Rating) of 'BB-' with a negative outlook, the country ceiling at 'BB-' (BB minus) and the short-term foreign currency rating at 'B'.

Sri Lanka got a 'negative' outlook in April 2006 when the conflict between the Tamil Tigers and the government intensified.

So far, so good

"The affirmation of Sri Lanka's 'BB-' (BB minus) ratings acknowledges that the feared adverse impact on the economy and sovereign creditworthiness has yet to materialise" Paul Rawkins, Senior Director in Fitch's sovereign team said.

"But Fitch still judges that the domestic security situation continues to pose risks to economic stability and growth and hence the Negative Outlook remains warranted".

If the conflict worsens to the point where it could undermine the country's credit fundamentals, a downgrade could be expected.

But Fitch says an upgrade to the outlook could be expected if the government gives 'clear signs