Aug 01, Colombo: Sri Lanka's US$ 1.12 billion deal with China to develop the Hambantota Port in southern Sri Lanka will boost foreign-exchange reserves and help repay some debt bolstering investor confidence, the global rating agency Moody's said Monday.
Earnings from the Hambantota Port stake sale will feed into the Central Bank's foreign-exchange reserves, which will help bolster investor confidence and encourage future portfolio inflows, Moody's said in its latest report.
"Importantly, the sale will allow the government to set aside earnings to repay its upcoming debt maturities and reduce its external debt, a key constraint on Sri Lanka's credit quality," it added.
Moody's said Sri Lanka's balance-of-payments position remains vulnerable after foreign-currency reserves materially declined in late 2016 and early 2017.
"More recently, reserves have risen somewhat because of capital inflows from international sovereign bond issuance and syndicated loans," the rating agency said.
The rating agency noted that the development of the broader Hambantota Port area will help bring in foreign direct investment into Sri Lanka, especially from China.
The buildup of associated infrastructure surrounding the port also can help attract greater private-sector investments, Moody's said.
"This, together with other ongoing development projects such as the Western Region Megapolis Plan and Colombo Financial City Project, will provide a stable source of financing for Sri Lanka's external position and support economic growth," it said.
"Closure of the long-pending deal also will allow the government to focus on key priorities, including advancing economic and structural reforms under its IMF program," the global rating agency noted.
Moody's said that the transfer of a 70 percent stake in the port on a 99 year lease will allow the government to set aside earnings to repay its upcoming debt maturities and reduce its external debt, a key constraint on Sri Lanka's credit quality.
According to the rating agency, external debt maturities in 2019-22 total 13.8 billion dollars. "Economic challenges would remain for the elevated government debt and the need to borrow more," it said.
"We expect the central bank to come close to its target, which would help support the sovereign's credit quality," Moody’s said adding that "Moving forward, greater exchange-rate flexibility and more limited foreign-exchange interventions by the central bank would help preserve reserves."
The government signed the deal with China Merchants Port Holdings on 29 July to jointly run the Hambantota port which had accumulated a loss of 46.7 billion rupees since 2011.