Fitch: Sri Lanka's External Finances under Pressure

( February, Hong Kong, Sri Lanka Guardian) Fitch Ratings says in a new report that Sri Lanka's sharp official reserve depletion in H211 has increased risks on the sustainability of its balance of payments. Last year's strong economic performance has led to a build-up of macroeconomic imbalances via increased imports, straining the balance of payments.

However, Fitch says it is too early to conclude that the pressure on the external finances, one of the sovereign's key rating weaknesses, has caused a marked deterioration in the sovereign credit profile.

"Recent policy developments are encouraging as they indicate the authorities are seeking an adjustment in the current account that could place the balance of payments on a more sustainable footing," says Philip McNicholas, Director in Fitch's Sovereign team.

Risks to the balance of payments remain in three areas: oil prices, global economic and financial conditions, and potential capital flight, none of which are in Fitch's base case scenario. Retaining investor confidence in the policy framework will be especially important to ward off the risk of capital flight. Thus, adhering to policies aimed at delivering a sustainable balance of payments, even at the cost of slightly slower growth, would support the current ratings. Conversely, policy slippage, leading to further current account deficit widening and risking loss of investor confidence, would be negative for the ratings.

The full report, entitled "Sri Lanka under Pressure", is available at www.fitchratings.com

Sri Lanka's External Finances under Pressure