Moody’s downgrade ‘unwarranted, erroneous suggesting reckless reaction’

In an extraordinary hard-hitting rejoinder to Moody’s downgrade of their Sri Lanka rating from B2 to Caa1 with a stable outlook, the Ministry of Finance, State Ministry of Money, Capital Markets and Public Enterprise Reforms (headed by former Central Bank Governor Ajith Nivard Cabraal) and the Central Bank accused the well-known rating agency of an “unwarranted and erroneous” finding that suggests a “reckless reaction.”

It said that “instead of understanding the economic turnaround as well as awaiting the Budget that is due in November, the downgrade of SL at the beginning of the Economic Revival is inexplicable.”

“This hasty rating action seems similar to the previous premature and reckless downgrades by rating agencies in the immediate aftermath of the ending of the internal conflict in 2009 and during the political impasse at the end of 2018. In both instances, the rating actions were proven to be hasty and erroneous, and those actions only resulted in several investors suffering unnecessary loses and missing out on emerging opportunities.”

“Moody’s rating downgrade fails to recognize and do justice to the ground reality of the ongoing rapid economic recovery backed by vastly improved business confidence arising from the return of political stability and policy stability after a lapse of five years,” the presentation said.

It went on to stress that Sri Lanka, like many of its peers in the emerging market group, experienced initial capital outflows, exchange rate depreciation, showdown in activity and pressure on government finances in response to the effects of the Covid-19 pandemic.

“But, the swiftness with which decisions were taken followed by the landslide victory of the government, enabled Sri Lanka to move along a recovery path towards growth and stability,” it said.

Since May, merchandise exports had bounced back, and by July, had returned to pre-Covid monthly averages of USD one billion, the presentation supported by graphs and charts said.

It argued that SL recognized the probable external sector pressure early, and decisively curtailed non-essential imports in order to prioritize external debt service obligations. The cumulative trade deficit by end December is expected to be around only USD 5.8 billion, significantly down from USD eight billion the previous year.

“The savings on the import bill due to the curtailment of non-essential imports as well as significant reductions in the fuel import bill is expected to be over USD 2.0 billion,” the presentation said.

Discussing the vital tourism sector, it said that although inbound tourist movements are yet not possible given the global pandemic situation, other service exports, including IT services and shipping remain robust. It added that workers’ remittances have recorded a sharp increase in spite of the initial expectations of a slowdown and at current trends, “the cumulative decline in workers remittances is likely to be marginal, compared to previous expectations of a decline of 15%.”

On foreign direct investment, it admitted that FDI inflows had slowed, but the investment pipeline is strengthening. While FDI slowed in the first half of this year (from a peak of USD 2,000 billion in 2018), looking ahead prospects were promising particularly with expected inflows into the Port City project and for new manufacturing projects.

“The expected finalization of new legislation for the Port City within a month will result in the realization of investment by those who have already completed due diligence on such investment,” the presentation said. “Other expected investments include import alternative industries as well as investments by international financial institutions.”

“FDI inflows during 2020 are expected to be over USD 750 million, which is only about USD 400 million less that in 2019. At the start of the pandemic, FDIs were expected to be only around USD 300 million for the year 2020.”

The presentation further said that stock market indices have improved dramatically to pre-Covid levels and are likely to gain further momentum. Also, foreign inflows to the government securities market have already showed signs of resumption and according to initial responses, are likely to increase in the coming months, particularly in the wake of the attractive SWAP arrangements offered by the SL authorities.

With increased emphasis on domestic agriculture, agro-based industries and resource-based industries, domestic economic activities have turned around remarkably and recorded V-shaped recoveries. A bumper Yala crop was expected to follow the bumper Maha. Industrial production has rebounded, electricity generation is normalizing with greater reliance on hydropower generation and the construction sector has gradually gathered pace.

The exchange rate had appreciated sharply since mid-April and remains stable at appreciated levels, allowing the Central Bank to accumulate reserves through market purchases of foreign exchange. Foreign inflows following the Moody’s downgrade enabled the Central Bank to purchase USD 30 million from the forex market on Sept. 29.

The presentation further said that the Debt to GDP ration which increased in recent years is expected to improve in the medium term; that envisaged financing inflows for 2020 favours domestic markets and strategic foreign financing; and that foreign Treasury bills and bonds holdings are likely to attract a substantial volume of investments in coming months.

Other positives outlined includes that official reserves of CBSL had increased to USD 7.4 bn. by end August 2020; a policy environment facilitating high economic growth beyond the recovery stage while preserving macro-economic stability and a “deep and unwavering commitment to our investors.”