S&P Cuts Sri Lanka Outlook to Negative on Funding Pressures

  • `Fragmented political landscape' heightens the challenge
  • Fitch had cut Sri Lanka's debt rating on refinancing risks

Standard & Poor’s cut Sri Lanka’s outlook to negative from stable citing worsening external and fiscal indicators, less than two weeks after Fitch Ratings lowered its credit ratings.  

S&P affirmed the island nation’s B+ long-term and B short-term sovereign ratings, saying robust economic growth prospects are countered by high government debt at 72 percent of gross domestic product. It predicts Sri Lanka’s trade deficit will balloon to 11.4 percent of GDP in 2016 from 10.2 percent over the previous two years as remittances slow and investor outflows are seen reversing only in 2017.

"The authorities face significant challenges in effectively addressing the rising imbalance due to institutional constraints and a fragmented political landscape," S&P analysts led by Kyran A. Curry wrote in a statement on Thursday. 

Prime Minister Ranil Wickremesinghe this month announced a plan to boost revenue by as much as 0.5 percent of GDP citing a “mountain” of hidden debt left by the previous government. The central bank last year allowed the rupee to float against the dollar as propping it up became too expensive, and analysts predict Sri Lanka’s benchmark stock index will continue to lag its regional peers.

Pressure may ease if Wickremesinghe wins a loan from the International Monetary Fund, S&P said. With few alternative funding sources, the nation’s ruling coalition partners will probably cooperate to implement proposed tax increases, political risk analysts at Eurasia Group said this week.

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