Sri Lanka: we deserve a ratings upgrade

Sri Lanka’s Central Bank Governor Ajith Nivard Cabraal explains why his country’s credit rating should be two notches higher.
Ajith Nivard Cabraal
Ajith Nivard Cabraal

There have been some big improvements in the Sri Lankan economy since the civil war ended in 2009. How was that achieved? 


Many countries squander their peace dividend but not Sri Lanka. Macro-economic fundamentals are now benign and there’s a huge infrastructure drive. We’ve had to take some tough measures though. Inflation had to be tamed and it took at least three years before people began to realise it would stay that way.

Sri Lanka had been a high inflation country for a very long time and changing that mindset has been one of our most important achievements. 

From an outsider’s perspective one of the most striking changes has been the advent of good roads. 


Yes. We’ve planned to build the highways so they can be widened in 10 to 15 years and will last for a century, not just a couple of years. It’s all been thought through very carefully and it’s not just at the national level either. Sri Lanka has 14,000 villages and they’re all now getting proper tar roads as well. 

When I last spoke to you in 2009 you were forecasting growth around the 8% level. Is that still your aim?


This year will be 7.8% and next year about 8%. We’re very comfortable with that level … We’re confident we can sustain current levels for the foreseeable future and that gives investors a lot of confidence. By 2020 we should be a $165 billion economy, up from $70 billion now.

The debt rating agencies say you need to improve revenue generation to bring down the budget deficit.


I think they’ve got things a little mixed up. They say we have to bring down the budget deficit and increase revenues. Well, we are bringing down the budget deficit and I think that’s good enough by itself. Yes revenues have not been increasing as much as they might but expenditures have been decreasing. It’s wrong to focus on just one indicator, which is a component of a much bigger indicator, the budget deficit. 

Will you meet this year’s 5.2% deficit target?


Yes, and we’ve been spot on for the last four years. Next year it will be 4.6%. 

The rating agencies also focus on your high level of debt-to-GDP. 


There has been a very clear downward trend. This year it will come down to 74% and next year we’re targeting 70%. By 2020 we expect it to be below 60%. The rating agencies have been rather slow reacting to improvements in the Sri Lankan economy but investors have not taken the same view. They’ve rewarded our consistent track record by enabling us to reduce our overseas borrowing costs.  

A decade ago the Philippines was Asia’s most active overseas borrower but it has since really ratcheted its costs down by raising more debt domestically.


I think that’s a sensible way to go and in the next few years you should see a similar trend in Sri Lankan debt management. Our current debt mix is about 45% domestic debt and 55% foreign, with concessionary loans accounting for about 60% of the foreign part.

There’s also a 12.5% cap on foreign investment in the domestic Treasury bond market. As local capacity increases, we may be able to reduce that further so we’re less dependent on what’s happening in the outside world.

You have $1.091 billion foreign debt falling due next year. Have you formulated a borrowing strategy yet?


We have sufficient cash to meet the payment. Ultimately it’s up to the government but we could veer more to re-financing than re-payment. Most of our recent dollar bonds have been 10-year maturities, except the last one, which was five-years.

At that time, rates were higher and we didn’t want to lock ourselves in for a longer period. But the way current rates are I think we’d be looking at a longer tenor again. 

The dim sum bond market is growing rapidly. Is this something Sri Lanka is interested in given your close links with China?


Yes, we’d be interested. We’ve been doing a lot of transactions in renminbi and developed a debt portfolio as well. We have Chinese loans with repayment in renminbi, so there’s a good reason to look at raising funds in the currency, which we could then retain as part of our reserves.

How important is the renminbi in your reserves mix?


We’ve been investing in the renminbi for the last six years and the amount has been increasing. It was quite modest to begin with but there’s a lot more interest in the currency now. And this will continue…

In September you set up a Rmb10 billion swap line with China. 


This will enable us to draw down any time we wish to. It’s an additional buffer, which is very helpful given how much trade we do with China. It should hopefully send a good signal to outside investors as well as the rating agencies if they’re able to pick that up.

You’re obviously unhappy with your B+/B1/BB- rating. What should it be?


We should be at least two notches higher. We’ve never defaulted on a single loan in our entire history and the direction we’re moving in is very clear. If you take these factors into consideration I don’t think we’ve been given our due place. And it’s unfortunate because certain investors can’t buy our debt because of the rating ceiling.

They seem fixated by your debt-to-GDP ratio, which is twice the double-B rating average.


They seem to fixate on a different indicator every year. They’re entitled to their opinion and we respect that. But at the same time the most important thing should be the trend.

A country can have a low debt-to-GDP ratio but be on a rising path. We’re going in the opposite direction.

Has Sri Lanka been upgraded since the end of the civil war?


Actually we had a funny situation a few years ago where we were on positive outlook but it was reduced to stable. Moody’s had the choice of moving us up or down but preferred to go down. There’s been no acknowledgement of the changes we’ve made.  

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