Download Downward Revision of Sri Lanka`s Outlook by the Fitch Ratings is

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Press Release
Issued By
Date
Economic Research Department
2009-02-27
Downward Revision of Sri Lanka’s Outlook by Fitch Ratings is unwarranted
Sri Lankan authorities is issuing this statement in response to the revision of the outlook on Sri
Lanka’s Foreign and Local Currency Issuer Default Ratings to Negative from Stable, while
reaffirming the country’s both long-term and short- term default rating. It is clear that the revision
is
based on the rating agency’s pessimistic view on the various measures currently being
implemented by the Sri Lankan authorities to raise external financing, and also its pessimistic
views on external current account deficit and future economic growth prospects. According to
Fitch Ratings, the revision reflects the concerns regarding the sovereign’s external financial
position in light of the decline in reserves. While it is true that reserves have declined, it should be
noted that it is a reflection of the consequences of global financial crisis which resulted in a global
liquidity crisis leading to the drying up credit lines. By now, it is well known that the Central Bank
had to provide foreign exchange to meet the demand arising from withdrawal of foreign investment
in government securities and payment of large petroleum bills and thereby prevent undue volatility
in the foreign exchange market. In fact, reserves had been built up by the Central Bank to face this
type of contingent events. This has not been unique to Sri Lanka and similar decline in reserves has
been experienced by many countries.
As admitted by Fitch Ratings, the Sri Lankan authorities have taken several measures to
boost reserves, which are yielding desired results. Already one regional country has extended a
Swap facility and negotiations with two other countries are at an advanced stage, and expected to
be finalized soon. At the same time, Sri Lankans living overseas are positively responding to
opportunities offered to invest in government securities and enhanced return on Non-resident
foreign currency accounts. As a result, we expect substantial investment flows from these measures
in the immediate future. The war on terror is also about to end, and an increased volume of
remittances are expected for reconstruction and rehabilitation in newly liberated areas. Going
forward, all these measures are expected to bring in substantial foreign inflows to the country and
help build Sri Lanka’s official reserves to a very comfortable level before long.
The pessimistic view of Fitch Ratings is reflected in its assessment of the current account deficit
of the BOP at 4.9% of GDP in 2009 which is considerably higher than the
assessment of Sri
Lankan Authorities (2.7%) as well as that of the Economic Intelligence Unit which is 2.1%. A
significant decline in trade deficit is expected due to sharp decline in commodity prices, in
particular petroleum. Therefore, a current account deficit
of relatively small magnitude as
estimated is expected to be quite manageable with anticipated financial inflows, especially, the
steady flow of remittances. In fact, the remittances during 2009 are expected to remain steady in
view of the nature of the Sri Lankan migrant workforce and the steps taken by authorities to direct
them through official channels.
It is true that the recessionary conditions in advanced countries could have some impact on growth
in 2009, but it is unlikely to bring growth down to 3 per cent projected by Fitch Ratings.
Lanka
Sri
has fully liberated the Eastern province and the entire North is to be liberated soon.
Accordingly, the work relating to rehabilitation and reconstruction will commence soon and a vast
area will be available for productive activity and hence, the growth momentum will not be as
pessimistic as projected by Fitch Ratings.