Fitch Ratings has affirmed Sri Lanka a stable outlook stating that the real GDP growth is relatively high and less volatile compared with its peers although average inflation over the past five years has been high and volatile compared with peers.
In releasing its rating on Sri Lanka yesterday Fitch ratings said the five-year average of GDP at 6.7% compares well with the 3.6% median for peers in the 'BB' rating category.
Fitch expects real GDP growth to stabilize in 2014 at the recorded 7.3% in 2013 and to rise to 7.5% in 2015. A pick-up in tourism is expected to continue to support growth.
The global rating agency affirmed Sri Lanka's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-'. The Outlooks on the ratings are Stable.
The issue ratings on Sri Lanka's senior unsecured foreign and local currency bonds are also affirmed at 'BB-'. The Country Ceiling is affirmed at 'BB-' and the Short-Term Foreign Currency IDR at 'B'.
Although official data do not point to overheating of the economy, as inflation (4.2% in March) and credit growth (4.4% in February) remained low, average inflation over the past five years has been high at 6.2% and volatile compared with the 5.0% median for the 'BB' peer group and therefore, potential for a build-up of future imbalances exists, the agency said.
"The authorities' pro-growth bias is illustrated by persistent 'twin deficits' and easing monetary policy measures since December 2012, even at high real GDP growth levels."
Fitch Ratings noted that public finances are weak relative to peers despite fiscal consolidation.
Both the budget balance (-5.9% of GDP in 2013) and government debt burden (78.3% of GDP in 2013) are more than double the 'BB' category medians of -2.7% and 35.9% of GDP, respectively.
The 2014 budget signals commitment to medium-term debt reduction to maintain a gradual fiscal consolidation path, although the process is slow and to a large extent built on revenue projections that may turn out too optimistic.
The rating agency notes that the current account deficit has fallen from 6.7% of GDP in 2012 to 3.9% in 2013 and expects it to narrow further to 3.2% by 2015 due to solid income from tourism and remittances.
However, Fitch says the current account deficit remains persistent and is only for a relatively small part financed by FDI inflows, which are relatively low.
Quantitative easing (QE) by the U.S. Federal Reserve has so far not led to severe market pressures for Sri Lanka, according to the agency.
The level of basic human development, including education, health and literacy, is relatively high, as indicated by a favorable UN Human Development Index score (Sri Lanka ranks 92 out of 187 countries, better positioned than all other South Asian and most Southeast Asian countries).
A Stable Outlook for the country reflects Fitch's assessment that upside and downside risks to the rating are well balanced.