US embassy cable - 05COLOMBO2069

UNCLAS SECTION 01 OF 02 COLOMBO 002069 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR SA/INS M GOWER; MCC FOR D NASSIRY AND E BURKE 
 
E.O 12958: N/A 
TAGS: ECON, EFIN, CE, ECONOMICS 
SUBJECT:  Sri Lankan Initial Sovereign Rating Sub- 
Investment, but Consistent with Expectations 
 
1. (SBU) Summary:  Sri Lanka received its first sovereign 
rating on December 8.  Fitch Ratings assigned Sri Lanka a 
?BB minus? rating (sub-investment grade) noting that all 
the long term rating outlooks were stable.  Standard and 
Poor's rating was slightly lower at 'B plus.'  The sub- 
investment grade ratings were related to continuing 
uncertainty surrounding Sri Lanka's political situation, 
the peace process and its relatively high budget deficit. 
Nonetheless, President Rajapakse used his maiden budget 
speech on December 8 as the occasion to announce the scores 
and Treasury Secretary PB Jayasundera indicated the country 
would possibly use the ratings to pursue a foreign bond 
issue.  End Summary. 
 
2. (U) On December 8, Fitch Ratings assigned Sri Lanka long 
term foreign and local currency ratings of 'BB minus.' 
Fitch also assigned the country a short term foreign 
currency rating of 'B' and a country ceiling of 'BB minus.' 
Fitch said in a rating action commentary that all the long- 
term rating outlooks are stable. 'BB minus' and 'B' ratings 
are below investment grade.  The 'BB minus' rating is the 
same rating assigned to Indonesia, Turkey and Vietnam.  It 
was lower than neighboring India's BB+ rating.   Fitch 
cited Sri Lanka's impeccable sovereign debt service record 
(due to heavy reliance on concessional, long-term debt) as 
a key support for the rating.   Paul Rawkins, Senior 
Director in Fitch's Sovereign team said in a statement that 
Sri Lanka has proved resilient to adverse shocks over a 
long period of time. 
 
3. (U) Fitch cited the fragile security situation and weak 
public finances as the key constraints on the ratings.  The 
rating takes into account the potentially volatile 
political situation and expectations about the ceasefire 
agreement.  Were violence to become more widespread, Fitch 
warned, the adverse impacts on economic climate would bring 
downward pressure on Sri Lanka?s ratings.  Fitch also noted 
that weak coalition governments have impeded fiscal 
consolidation. 
 
4. (U) Standard and Poor's issued Sri Lanka a 'B plus' 
rating and also noted that the near-term outlook is stable. 
Standard Poor's highlighted the GSL's high debt level, weak 
revenue mobilization and continued security concerns as the 
principal sources of risk faced by investors in Sri Lanka. 
 
5. (U) Sri Lanka had also requested a rating from Moody's 
Investor Services, but their score has not yet been 
announced (Note: the credit ratings are done at the 
Government's request and 'belong' to the GSL.  It is the 
GSL that decides whether or not to make the scores public. 
End Note). 
 
6. (SBU) Citibank provided advisory services to the 
Government on the rating.  Kapila Jayawardena, CEO of 
Citibank NA, told EconFSN that the Government was aware 
that it would not get an investment grade grading (BBB or 
above) but should be happy with the current rating around 
'BB minus.'  He said that Sri Lanka had been conspicuous by 
not having an international rating.  He also hoped that the 
rating would prompt the GSL to instill greater fiscal 
discipline as a future downgrade in its credit rating would 
be politically sensitive.   Jayawardena further suggested 
that the rating would increase both Sri Lankan Government 
and business opportunities to seek funding in international 
markets. 
 
7. (U) Analysts widely expected Sri Lanka to use the rating 
to seek capital on the international market at better rates 
than the prevailing 11 percent domestic rate.  At a 'BB 
Minus' rating, Sri Lanka might see rates around LIBOR plus 
300 basis points (around 7 to 7.5 percent) in the 
international markets.  Speaking to reporters, Treasury 
Secretary PB Jayasundera noted ''this is a positive step 
 
SIPDIS 
toward capital market development and I hope our corporates 
will make use of it.  The government doesn't have ambitious 
plans for excessive borrowing, but the rating enables us to 
look for slightly wider markets, especially to mobilize 
global funds belonging to Sri Lankans.'' 
 
8. (SBU) Comment: Post met with the three agencies during 
their initial visits at the request of both Citibank and 
the GSL.  We see this as a positive move on the part of the 
GSL, as it opens Sri Lankan finances yet further to 
international scrutiny.  Having used the budget speech as 
the venue for announcing the ratings, the President 
inherently linked the country's fiscal situation with its 
international funding prospects.  These ratings, in 
addition to the GSL's interest in Millennium Challenge 
Account funding, will give reform-minded, growth-oriented 
camps more ammunition to use when confronting the GSL on 
its tendency toward government largesse.  End Comment 
LUNSTEAD