Spotlight: Econ Op-eds in Summary (Week ended 07th October'20)
1. Moody’s decision to downgrade Sri Lanka premature
By: Dinesh Weerakkody
· Moody’s during this week decided to downgrade Sri Lanka’s long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 and changed the outlook to stable, a move, analysts say is premature and unwarranted for, and could result in several investors suffering unnecessary losses and missing out on potential business opportunities.
· The Caa rating indicates that debt is judged to be speculative and of poor standing and is subject to very high credit risk. While Sri Lanka’s large financing needs over the near- to medium-term can put more pressure on the sovereign’s external liquidity position, the latest rating does not reflect the potential for growth to recover in 2020-21. It also doesn’t reflect that Sri Lanka’s institutional strength in many areas is high relative to similar rated peers like Iraq.
· Going forward, the government is best advised to work on a medium-term financing strategy that involves both multilateral and private sources that can deliver a manageable cost of debt, and a faster and more sustained build-up in non-debt creating foreign exchange inflows. Furthermore, a progressive Budget and joint Government-private sector led initiatives to attract FDI and further strengthen Sri Lanka’s exports must become a national priority.
2. The debt challenge
Daily FT Editorial
· With an estimated USD 13 Bn. to be paid till 2023, Sri Lanka faces significant challenges with its debt servicing obligations over the next few years. Combined with the country’s low growth figures it will pose significant economic challenges for the better part of the decade. Additional loans may be required to this end.
· Sri Lanka will manage its debt commitment this year, but maintaining Rupee stability in the face of the 2021 commitment will be difficult unless reforms are implemented and there is an improvement in the pandemic situation. The government’s policy direction along with the budget will play a major role in this process.
· It is paramount that the government implements long term solutions including increasing public revenue via taxation, reform of State Owned Enterprises, expenditure rationalisation and improve the ease of doing business in order to boost investment and exports to build reserves and repay debt without relying on more borrowings.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Eshan de Mel)
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