July 18, 2011 / 4:43 PM / 8 years ago

Sri Lanka's fiscal prudence under IMF helps rating upgrade

* Sri Lanka achieving IMF targets helps rating change-rating agencies

* Rating upgrade comes ahead of $1 bln, 10-yr eurobond

* Rating agencies warn on high debt

By Shihar Aneez

COLOMBO, July 18 (Reuters) - Sri Lanka’s efforts for fiscal discipline under an IMF loan programme amid a post-war economic recovery with high growth and moderate inflation have helped to boost country’s rating and outlook, two global rating agencies said on Monday.

Fitch Ratings upgraded Sri Lanka’s Long-Term Foreign and Local Currency Issuer Default Ratings to ‘BB-‘, three notches below the investment grade, from ‘B+’, while Moody’s changed the rating outlook to positive on a B1 rating, four notches below investment grade. ,

“The upgrade reflects the stabilization and recovery of the economy under the country’s IMF programme and increased efforts to address the chronic budget deficit position,” said Art Woo, director of Fitch’s Asia Sovereign Ratings group.

The budget deficit which hit an eight-year high of 9.9 percent in 2009 declined to 8 percent last year and the government plans to reduce it to a 19-year low of 6.8 percent this year, as agreed under terms of a $2.6 billion IMF loan.

Greater macroeconomic and financial stability, a pro-growth and reformist policy orientation, improving external payments position, and lower political risk since the end of a civil war in May 2009 prompted the change, Moody’s said.

The positive rating signals come as Sri Lankan central bank officials are in New York on a road show ahead of a $1 billion, 10-year sovereign bond issue, the country’s fourth since 2007, later this month.

“We are pleased with the rating upgrade,” Central Bank Governor Ajith Nivard Cabraal told Reuters from New York. “We are comfortable with the comments they have made.”

Both rating agencies, however, warned that the debt overhang and large servicing cost could have a negative impact on future ratings.

“Continued deficit reduction as targeted by the government coupled with the containment of inflation amidst sustained high rates of growth would be credit positive developments over the 12-18 month rating horizon,” Moody’s said

Fitch also said it would view the island nation’s ability to keep trimming the budget deficit, by enhancing the tax base and rationalising expenditure, and lowering the public debt level as supportive for future ratings. (Reporting by Shihar Aneez; Editing by Bryson Hull)

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