Sri Lanka risk-score undermined by political and economic challenges

By:
Jeremy Weltman
Published on:

The sovereign is still struggling in Euromoney’s risk survey as economic and fiscal indicators deteriorate, corruption investigations dampen China-sourced foreign investment and a looming general election makes it uncertain whether the new president’s parliamentary backers can produce a majority.

In 2013, an Asiamoney article quoting Barclays declared: "Sri Lankan bonds do not offer enough premium to compensate for policy risks."

Two years on, risk experts still have their doubts, despite the electorate removing the then-president Mahinda Rajapaksa on charges of corruption and cronyism, and ushering in Maithripala Sirisena on a democratizing, pro-western agenda.

Sri Lanka has risen one place in the rankings this year, but one- and two-year comparisons still show trend declines.

The country’s present ranking of 78th out of 186 sovereigns, based on a total risk score of 43.8 out of a maximum 100 points, keeps the sovereign firmly embedded in the fourth of ECR’s five tiered categories commensurate with a B- to BB+ frontier-market credit rating.

Sri Lanka is rated BB- by Fitch, but only a top single-B grade by Moody’s and Standard & Poor’s, and is riskier than India on all but three of the 11 economic and political risk characteristics:

 

Economic challenges

The survey’s economic scores present a mixed picture. The country fares reasonably well for its growth and employment outlook, scoring more than six points out of the 10 marks allocated in the survey, but racks up less than four points for currency stability and the government’s finances.

The latest IMF report on Sri Lanka highlights broad-based real GDP growth of 7.4% in 2014, despite weather-affected agricultural production, and lower inflation of 3.3%, falling further this year.

However, the pace of economic expansion is slowing and could come in at around 6.5% in 2015, the IMF believes, despite finance minister Ravi Karunanayake’s 7.2% prognosis.

Samantha_Amerasinghe-160x186
Samantha Amerasinghe,
Standard Chartered Bank

Corruption is a big factor. It is rated the worst of all the six political risk indicators in Euromoney’s survey, scoring just 3.7 out of 10, and is directly undermining the economy according to Samantha Amerasinghe, an economist at Standard Chartered Bank.

She says: "Many of the investment projects – which are China-funded – have been put on hold by the new government [because of corruption probes], which is a huge concern as it could impact on future foreign investment into the country."

The recent interest-rate reduction by the central bank should stimulate credit growth, there are decent growth prospects in the US, a key export market and wage rises, which should all prevent the economy from slowing down too much.

However, increased government spending and lower tax receipts will worsen the fiscal deficit, which exceeded the target last year, and is forecast to rise to 6.7% of GDP this year, according to the IMF. That means pushing the domestic and external government debt higher to 77% of GDP.

Political concerns

The political situation is also worrying, says Amerasinghe, who adds: "There is continuing uncertainty as to when the general election will be held, which is weakening the credibility of the government."

Sirisena’s government is unable to act decisively as it does not enjoy a majority in Parliament but needs to tackle an inadequate regulatory environment.

Sri Lanka rose six places in the World Bank’s Doing Business 2015 rankings, but is still only 99th from 189 countries owing to the high costs and bureaucracy involved, which stifles entrepreneurship and inward investment.

"The electorate appears to be increasingly disillusioned over the government’s failure to deliver tangible results, and support for former president Rajapaksa is gaining impetus," says Amerasinghe.

The fact ECR experts have downgraded factors such as government stability and the regulatory and policymaking environment this year are warnings that Sri Lanka’s credit environment remains high risk.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.