Oil price spike to threaten Lanka’s rating, says S&P

*Treasury Secy. says economy would stabilise, govt. forecasts
account for US$ 120 oil price per barrel

 *Sovereign bond issue this October

 *Rupee to appreciate soon, speculators beware


Sri Lanka’s sovereign rating could be at risk if global oil prices continue to increase, Standard and Poor’s said yesterday (April 30), warning that subsidies would have to be adjusted accordingly in order to avoid a possible downgrade.

A Standard and Poor’s report titled ‘The Asia-Pacific Sovereign Seesaw: If Oil Prices Soar, Some Ratings Could Fall’ said that oil subsidies can weaken fiscal and external indicators underpinning sovereign creditworthiness despite the support they lend to economic growth. Lowering subsidies, on the other hand, may risk political instability for some sovereigns.

"In India and Sri Lanka, we expect fuel and related subsidies to markedly worsen fiscal and external deficits unless subsidy levels fall. In the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result," said Standard & Poor’s credit analyst Kim Eng Tan.

Standard & Poor’s Ratings Services said that a sustained increase in oil prices could catalyze rating actions among some Asia-Pacific sovereigns.

"Sovereigns that subsidize oil consumption are the most vulnerable to negative rating actions if average oil prices stay above US$150 per barrel for more than a year, a scenario we currently consider to be only modestly likely," Tan said.

The report said that credit metrics of almost all sovereigns in Asia-Pacific would weaken from a scenario of rising oil prices. But policy decisions—e.g., toward subsidies—would affect the severity of the deterioration and the impact on various credit factors. These will determine how, and if, sovereign ratings change.

Sri Lanka recently introduced sharp increases to domestic fuel prices in a bid to contain a growing trade deficit and balance of payments problem.

Treasury Secretary Dr. P. B. Jayasundera told journalists yesterday that the government was committed to reducing the budget deficit target to 6.2 percent of GDP this year. He said if global oil prices did not increase by much, Sri Lanka could stabilise its balance of payments, bring down the exchange rate to well below Rs. 125 to a dollar and ease pressure on interest rates to rise.

He said the government had made all its forecasts on the assumption that oil would reach US$ 120 a barrel this year, anything more than this the economy would feel added pressures.

He said the government was planning to rollover a US$ 500 million sovereign bond issue this October, but would increase the tenure to 10 years.

"A bigger issue will also be noticed by the larger fund managers so we are exploring the possibilities of raising a further US$ 500 million and we are confident we would be able to price it below previous issues," he said in response to a query raised by The Island Financial Review.

Dr. Jayasundera said the exchange rate was being manipulated by speculators.

"We do not have to get worried about this. We need to give the market space and time to find the appropriate exchange rate. At the moment, the movement of the exchange rate is not backed by fundamentals. Speculators are leading the market. The recent measures we have taken should bring the exchange rate to well below Rs. 125 to a dollar. If speculation persists, the government is willing to intervene, but for the moment, we are adopting a professional approach and we will see what happens," he said.

Dr. Jayasundera said that should the exchange rate fall to Rs. 140 to a dollar, or even Rs. 150, it meant that the economy could handle it because the demand was still there. "This will show that people are still willing to pay Rs. 150 for a dollar. However, the measures we have taken in the recent past will bring the necessary changes to reduce the trade deficit and I am optimistic that the rupee would begin to appreciate. By end May we will see more clearly the results of the recent policy actions," he said.

In 2008 and 2009 the exchange rate had come under the influence of speculators. "The government intervened then, and it would do so now, if the need arises," Dr. Jayasundera said.

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