Nov 17, Colombo: Global credit rating agency, Moody's Investor Service says some aspects of Sri Lanka's 'peace dividend' appear to be waning, namely, the reductions in inflation and in government funding costs.
The rating agency says the outlook for Sri Lanka's B1 rating is positive, but it depends on the effective management of macroeconomic challenges.
Although Sri Lanka's strong growth trend supports the rating, the economy has faced a number of challenges over the past year, according to a release issued yesterday by the Agency.
According to a new Moody's report titled, "Credit Analysis: Sri Lanka" the B1 rating reflects low Sovereign Bond Methodology scores for economic and government financial strengths, moderate for institutional strength and susceptibility to risks from financial, economic, and political events.
GDP growth rose to 8% in 2010 and 8.3% in 2011, following the end of the civil conflict in May 2009 but for 2012 it is projected to be around 6.8%.
"Therefore, sustaining strong growth and price stability will entail steady and effective macroeconomic management and further improvement in the investment environment," the report suggests.
Developments in the country's balance of payments position will be central to the rating outlook, the investor service noted.
According to Moody's the policies implemented by the government earlier this year have limited downward pressures on the external accounts which emerged in late 2011.
"While reserves have stabilized recently, a slowdown in exports suggests that Sri Lanka's vulnerability to external risks has not significantly receded," the statement said.
Renewal of the International Monetary Fund's stand-by agreement with Sri Lanka, which ended earlier this year, would be positive for the country's external payments position, although the prospects and size of a fresh loan are uncertain, it said.
Fiscal space and flexibility are limited by Sri Lanka's high government debt and refinancing needs, the rating agency points out.
However, the government's goal to reduce the budget deficit to 5.8% in 2013 from a 6.2% targeted for this year underscores the government's commitment to and success in fiscal consolidation, the agency says.
The rating agency notes that the continued progress in the reconciliation with the Tamil minority would ensure social stability and boost economic growth in the Sri Lankan economy.
"However, Sri Lanka's 'moderate' susceptibility to event risk reflects latent political risks in a country which only recently emerged from a long civil war," the agency said.