Further political tension could also spark capital outflows and raise the country’s risk premia, exacerbating already tight financing conditions globally, Moody’s, a United States of America (USA) based credit rating agency warned in a report, today.
‘Fiscal challenges have also increased due to continued political tension and disruption to fiscal and economic policy-making to slow budgetary consolidation efforts, keeping the Government debt burden higher for longer, the rating agency said.
‘Foreign exchange (FX) reserves are already low, and gross borrowing requirements are large, threatening the ability of the Government to refinance debt and fund deficits affordably,’ it added.
FX reserves have declined owing topersistent current account deficits in the balance of payments, which have widened over the past two years. ‘Our external vulnerability indicator (EVI) reading exceeds 160% for the year, indicating that total public and private external debt due over the next year is larger than Sri Lanka’s FX reserves,’ said Moody’s.
Tighter global funding conditions resulting in higher credit risk premia and/or high domestic interest rates would quickly transmit to Government finances – where debt affordability is already weak owing to large gross borrowing requirements.