Sri Lanka’s outlook lifted from ‘negative’ to ‘stable’ by Standards and Poor’s
Standard and Poor’s (S&P), has reportedly lifted the outlook on Sri Lanka’s ‘B+’ rating to ‘stable’ from ‘negative’ as the country raised taxes to pay for salary and subsidy hikes in 2015, leaving behind a balance of payments crisis.
“The stable outlook reflects our expectation that the government will maintain the reform momentum over the next 12 months and smooth the upcoming surge in debt redemptions, particularly in 2019,” the rating agency has stated.
Sri Lanka is to pass a new law to raise more debt to repay some debt, amid much fanfare about ‘bunching’, despite having a mechanism to repay debt with forex reserves, without harming the domestic money supply (monetary policy neutral).
The outlook upgrade however will make it easier and cheaper for Sri Lanka to raise debt in the near term, amid the possibility of a rise in benchmark, dollar yields.
According to a local news report, Central Bank Governor Indrajit Coomaraswamy has said he wanted to implement policies that strengthen confidence will compress the risk premium in the future.
Coomaraswamy has brought credibility back to the central bank and has stopped printing money, and is now sterilizing forex purchasing, putting strong upward pressure on the currency to contain inflation.
But analysts have warned that a policy of targeting a real effective exchange rate by weakening the nominal exchange rate could generate higher inflation in the country.
In 2017 also the ‘mid-single digit’ de facto inflation target is expected to be overshot.
“A higher rating is unlikely in the next 12 months, but upward pressure could coalesce if Sri Lanka’s external and fiscal indicators show dramatic improvement,” S&P has said in a statement.
“Upside pressure could also materialize if we conclude that there has been a substantive improvement in Sri Lanka’s institutional settings, including a continued strengthening of monetary policy credibility and independence at the central bank.”
“Downward pressure on the rating could materialize if the political environment were to become more fractious, derailing the legislative program, especially its liability management reform.”
S&P said despite a coalition government, an inland revenue law and other reforms were taking place and an International Monetary Fund deal was also in place.
The lifting of Sri Lanka’s outlook from negative to stable by Standard and Poor would serve as an indicator of the positives in the country’s economy. The government is now focused on implementing policies that strengthen confidence. Any foreign investor looking at Sri Lanka’s current economic conditions and opportunities would undoubtedly choose the island nation as their business destination.
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