Sri Lanka slams S&P following downgrade of credit rating

Sri Lanka slams S&P following downgrade of credit rating

Sri Lanka today slammed Standard & Poor (S&P) Global Ratings after the country’s credit rating was downgraded from B to CCC+.

In a statement issued by the Finance Ministry, the Government of Sri Lanka (GOSL) said it is disappointed with today’s rating action by S&P Global Ratings at a time when the Parliament of Sri Lanka has just passed, with an overwhelming majority, the new Government’s first full-year Budget for 2021.

The Government says the Budget for 2021 laid out a carefully crafted medium-term policy framework, alongside a novel orientation for a solid recovery of the economy in the period ahead.

“It is surprising to note that S&P, in its assessment has ignored the envisaged medium-term positive developments as a result of several key proposals presented in the Government Budget 2021 with regard to fiscal consolidation and deficit financing in the period ahead,” the Finance Ministry said.

The Finance Ministry said that as indicated in the Budget 2021, the Government has adopted a novel approach in relation to foreign financing while enhancing the effectiveness of already secured financing channels, aimed at reducing the share of foreign financing of the budget deficit over the medium term.

“Yet, S&P, in its medium-term projections, grossly overstates the level of fiscal deficit and the external deficit of the country. In contrast, the forward-looking financing model of the Government, which is skewed heavily towards domestic financing, will capitalize on the benefits of increased domestic savings and the low-interest rate regime already in place given the subdued levels of inflation and well-anchored inflation expectations at present. In the immediate future, the ongoing economic recovery is expected to contribute to boost revenue for the Government. The envisaged improvements in economic growth, supported by low-interest rate regime and incentives being offered for investment, would help consolidate Government debt in the period ahead. Reflecting the impact of measures already put in place by the Government, the relative share of outstanding foreign debt has declined notably at present,” the Finance Ministry said.

The Finance Ministry said that based on such highly pessimistic assumptions, S&P projects a path of Government debt to GDP ratio over 100 per cent from 2021.

“This is mainly due to the unrealistic estimate of the budget deficits from 2021, without considering the spillovers from the economic recovery facilitated by significant policy stimulus already in place. Further, any increase in the share of domestic government debt in a low-interest rate regime and when the economic growth rate is expected to be above the real rate of interest, the government debt management would not be a major source of concern in the period ahead,” the Finance Ministry said.

The Government says recently introduced measures to entice foreign investors to the government securities market and the real economy through an attractive foreign exchange swap arrangement are likely to help enhance foreign currency inflows in the near term.

The Government is expecting the disbursement of the 2nd tranche of the Foreign Currency Term Financing Facility proceeds from the China Development Bank in early 2021. Liquidity facilitation measures in the form of swap arrangements from abroad are explored by the Central Bank and a significant foreign exchange volume-based facility from a major Central Bank is now at an advance stage of completion.

Sri Lanka says it is premature for S&P to announce a rating downgrade when the policy framework presented in the Budget 2021 is receiving a wider commendation for consistency and continuity, with a clear medium-term view of fiscal consolidation on a realistic economic footing.

The Government says such action simply demonstrates the prejudicial approach, as in the case of recent rating actions by other international rating agencies without weighing the impact of alternative strategies of the Government.

Courtesy: Colombo Gazette