Economic

But pressures will be mitigated somewhat by the renewed IMF program
Warns growth will be slower than projected 3.6%
Tourism decline will hit current account deficit
Debt refinancing vulnerabilities could increase if market confidence undermined for longer
Worries political tensions will resurface as Presidential elections edge closer

The tragic Easter bombings in Sri Lanka will result in lower economic growth this year and could increase external financing pressures, Fitch Ratings said in their latest update, but indicated such pressures were mitigated by the Government’s continued adherence to economic policies that have enabled Sri Lanka to get its International Monetary Fund (IMF) program back on track.

Last month’s bombings, which targeted major hotels in Colombo as well as churches, will lead to a reduction in tourism receipts, which had risen steadily in recent years to $4 billion in 2018, or about 5% of Fitch-estimated GDP, Fitch said. The Government had forecasted a further rise to $5 billion this year. In response to the bombings, it now plans to launch an extensive tourism promotion campaign, alongside efforts to support the sector that could reportedly include VAT cuts and subsidies.

“The full impact on tourist arrivals will depend on the Government’s success in restoring security and the effectiveness of the measures to support the sector, particularly once the peak season begins in November. Nevertheless, we think 2019 GDP growth could be 1-1.5pp lower than our 3.6% forecast when we last reviewed Sri Lanka’s sovereign rating in December due to reduced arrivals and spending. Backward linkages to the wider economy have been significant through job creation and construction activity and could amplify the impact,” it said.

Fitch also believes there will also be a significant impact on the current account deficit. Tourism provided nearly half of last year’s services receipts ($8.4 billion) and the Sri Lankan authorities estimate that the current account deficit could widen to 2.7-2.8% of GDP in 2019, compared with their earlier forecast of 2.3%.

March’s $2.4 billion sovereign bond issue helped ease near-term fiscal and external financing constraints, but vulnerabilities would increase if the bombings undermine market confidence for a sustained period. Foreign-currency-denominated sovereign debt repayments for 2019-2022 total $16.8 billion against the Government’s projections of reserves of between $7.2-7.5 billion at end-2019, down from its earlier projection of $8-8.2 billion.

These challenges increase the importance of Sri Lanka’s IMF program in catalysing funding support and as a policy anchor.

The IMF Executive Board completed the fifth review under the program this week, noting that it had been successfully brought back on track after being put on hold during Sri Lanka’s political crisis last year. Completion of the fifth review releases $164 million, bringing total disbursements under the program to $1.2 billion. Importantly, the IMF also extended the program by a year to June 2020, giving more time to complete economic reforms.

“The adequacy of foreign exchange reserves and refinancing risks remain key for Sri Lanka’s sovereign rating, as highlighted in our rating sensitivities. Our downgrade to ‘B’/Stable from ‘B+’/Stable last December reflect heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation due to the political crisis. Political tensions could resurface towards the end of 2019, when Presidential elections are due,” Fitch added.

(FT)