Sri Lanka’s External Finances under Pressure – Fitch
SL Govt. under pressure
Sri Lanka’s sharp official reserve depletion took place in the 2nd half of the year 2011 has increased risks on the sustainability of the country’s balance of payments, says Fitch Ratings.
The agency in a new report points out, that last year’s strong economic performance of the country has led to a build-up of macroeconomic imbalances via increased imports, straining the balance of payments.
However, Fitch says it is too early to conclude that the pressure on the external finances, one of the sovereign’s key rating weaknesses, has caused a marked deterioration in the sovereign credit profile.
“Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance of payments on a more sustainable footing,” says Philip McNicholas, Director in Fitch’s Sovereign team.
The Rating firm observes that the risks to the balance of payments remain in three areas, such as oil prices, global economic and financial conditions and potential capital flight and none of them are in Fitch’s base case scenario.
Fitch in its new report, titled “Sri Lanka under Pressure” also says retaining investor confidence in the policy framework will be especially important for Sri Lanka to ward off the risk of capital flight.
It points out that, adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings.
“Conversely, policy slippage, leading to further current account deficit widening and risking loss of investor confidence, would be negative for the ratings” added Fitch in its statement issued to the media.
