Sri Lanka’s move to introduce a bill that empowers the government to seize assets of private companies would increase “investor uncertainty” and is “credit negative,” Moody’s Investors Service said.
The new law gives the government the power to acquire one holding company and 36 assets held by private companies that have at some point received aid or land from the state, Moody’s said in an e-mailed statement. The government has stated that the bill aims to seize assets that are either underutilized, or idle or contravened public interest, Moody’s said.
“Despite authorities’ statement that this is a one-off move and that further expropriation will not occur, the measure may undermine the predictability of future policies and increase investor uncertainty, which would make it credit negative for Sri Lanka,” Moody’s said.
The government will have the power to acquire assets of companies including Pelwatte Sugar Industries Plc (SUGA), a subsidiary of Sri Lanka’s biggest liquor maker, and Hotel Developers Lanka Plc., which owns the Hilton Colombo, according to the bill.
“It is unclear, however, whether the assets will be managed by the state or resold to other investors, and how performance will be revived,” according to the statement. “The use of the fast-track procedure, which we believe limits public scrutiny, largely reflects the tendencies of the current government to exert strong and direct influence over the economy.”
Moody’s has a B1 credit rating on Sri Lanka’s foreign- currency debt, which is four levels below investment grade. In July, Moody’s raised the nation’s rating outlook to positive.
The act, called the Revival of Underperforming Enterprises and Underutilized Assets bill, was presented in parliament on Nov. 8 by Prime Minister D.M. Jayaratne and passed on Nov. 9.
Sri Lanka’s Supreme Court last week ruled that the bill was not inconsistent with the nation’s constitution, Moody’s said.
“Maintaining investor confidence is key to Sri Lanka’s ability to continue to collect the peace dividend,” Moody’s said. “But an unintended consequence of this expropriation measure may be that it casts a cloud over the investment climate.”
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