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* Moody's assigns B2 rating to Sri Lanka's proposed senior unsecured US dollar bonds
Mon, Jun 24, 2019, 03:25 pm SL Time, ColomboPage News Desk, Sri Lanka.

June 24, Colombo: Moody's Investors Service has today assigned a B2 rating to the Government of Sri Lanka's proposed senior unsecured US dollar-denominated bonds.

The rating is based on the preliminary offering memorandum received on 19 June, 2019.

The bonds will rank pari passu with the Government of Sri Lanka's current and future senior unsecured external debt. The B2 rating assigned to the notes mirrors the Government of Sri Lanka's issuer rating of B2.

The proceeds of the bonds are intended to meet government expenditures.

RATINGS RATIONALE

Sri Lanka's credit profile reflects significant government liquidity and external vulnerability risks. This is balanced against moderate per capita income levels and stronger institutions relative to many similarly-rated sovereigns that support the B2 rating.

Foreign exchange reserve coverage of forthcoming government debt maturities and economy-wide external debt obligations is low. This leaves Sri Lanka with small buffers to manage repayments and, as a result, the government and the country are highly exposed to refinancing risk and shifts in market sentiment.

Lower tourism arrivals and spending following the April 2019 terrorist attacks will impact GDP growth, further straining public and external finances. Moody's expects fiscal deficits to remain around 5% of GDP in 2019-20, from 5.3% in 2018, and government debt to stay at about 82%-83% of GDP in the next few years -- higher than many B-rated sovereigns. In addition, a number of financially strained state-owned enterprises with sizeable liabilities pose material risks to the government's balance sheet, should financial support be needed.

Set against these challenges, Sri Lanka's growth potential, relatively large economy and high income levels compared with similarly rated sovereigns provide the economy with some shock absorption capacity and help limit some of the risks from the country's very high debt burden.

The extension of the IMF's Extended Fund Facility programme through June 2020 will underpin the continued passage of reforms aimed at enhancing fiscal resilience. Planned changes to Sri Lanka's Monetary Law Act should help the central bank to anchor inflation expectations and ensure monetary policy independence from fiscal developments. However, political tensions could also resurface before and after the presidential elections scheduled for late 2019 and the parliamentary election in 2020. That could undermine international investors' confidence in Sri Lankan financial assets, and threaten the government's ability to refinance its upcoming debt obligations.

ISSUER RATING OUTLOOK

The stable outlook denotes balanced credit risks at the B2 rating level. Moody's expects that the government will remain broadly focused on implementing important fiscal, monetary and economic reforms that would strengthen the credit profile over the medium term. However, Moody's assessment is that the government's debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk.

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading the rating should it conclude that Sri Lanka's vulnerability to refinancing risk, which anchors the rating at B2, is likely to diminish. In particular, a faster and more sustained buildup in non-debt creating foreign exchange inflows, which could stem from policy measures which improve investor confidence and enhance FDI inflows, would bolster reserve adequacy over time and lower government liquidity risks and external vulnerability risks.

The implementation of further reforms that significantly lower fiscal deficits and government debt and enhance debt affordability could also prompt Moody's to upgrade the rating.

WHAT COULD CHANGE THE RATING DOWN

Given repeated large debt maturities over the next five years and Sri Lanka's already high exposure to refinancing risk, Moody's would consider downgrading the rating if external and domestic financing conditions were to deteriorate further than currently expected. In particular, a larger drain on foreign exchange reserves would increase the risk of lower capital inflows and sharply raise refinancing costs. This would contribute to repayment stresses that would be more consistent with a B3 rating.

Moody's would also consider downgrading the rating if the government were to reverse recent reforms or to halt implementation of future reforms to address fiscal and external vulnerabilities and bolster GDP growth potential. That would lead to much wider fiscal deficits, larger gross borrowing requirements and higher government debt than Moody's currently projects, weighing on already very low fiscal strength and further heightening liquidity risks.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related economic statistics included in rating announcements published after June 3, 2013.

This credit rating and any associated review or outlook has been assigned on an anticipated/subsequent basis. Please see the most recent credit rating announcement posted on the issuer's page on www.moodys.com, under the research tab, for related summary rating committee minutes included in rating announcements published after June 3, 2013.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable. (Moody's Media Release)

 

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