Central Bank snubs S&P’s negative sovereign rating outlook

Says it is unwarranted, untenable, illogical, ill-advised and irrational

The Central Bank last week snubbed globally famous rating agency S&P’s decision to cast a negative outlook on Sri Lanka from the previous view of ‘stable.’

Central Bank Governor Ajith Nivard Cabraal

“Sri Lankan authorities are greatly surprised and disappointed by the decision taken by S&P to revise the outlook on the rating of the country from “stable” to “negative” last week,” the Bank said in a statement.

It said such a change has been effected without any prior information or discussion with the Sri Lankan authorities. “The reasons that have been attributed by S&P for the revision of outlook are also untenable,” it added.

Sri Lanka’s key macroeconomic variables have shown overall improvement since the last revision of outlook by S&P in August 2007. In particular, the debt to GDP ratio, budget deficit, government revenue, foreign reserves, economic growth, investment and savings and balance of payments have improved significantly. The performance and the stability of the financial sector has also improved. The tight reserve money targets of the Central Bank were met with comfortable margins and the growth in broad money decelerated by end 2007. The net credit to the government was within the targeted levels and the credit to the private sector decelerated. The unemployment rate declined to its lowest ever level. At the same time, while inflation has been relatively high in Sri Lanka, it would be noted that high inflation is now a concern worldwide, as rising commodity and oil prices are impacting all countries. Further, the recent high inflation in Sri Lanka has also been mainly due to the removal of oil subsidies, which in the long-term, would have a favourable impact on the economy. In the meantime, the Government revenue to GDP ratio has been consistently improving over the past few years and the fiscal deficit as a percentage of GDP has also decreased in 2007.

It is also noted that S&P has referred to recent developments in the Government’s war against Tamil separatists as being a weight on the Sri Lankan rating. It is quite disappointing that S&P has apparently not realised that “war on terrorism” is a global effort and many countries are today dealing with terrorist threats in a similar manner. In that context,

S&P’s emphasis of this matter at this point of time when the Sri Lankan military is making clear headway in its effort to defeat terrorism and when a political way-forward as proposed by the All Party Representatives Committee is being implemented by the Government, raises further concerns as well.

It is abundantly clear that S&P has chosen to overlook the many favourable factors and are, for reasons best known to them, suddenly discovering weaknesses in fiscal and debt consolidation of such a magnitude that the outlook needs to be changed urgently. This sudden reaction raises grave doubts as to the objectivity and impartiality of their decision, and Sri Lankan authorities view S&P’s decision as being illogical, ill-advised and without rational basis or foundation.