Sri Lanka’s high external funding remains rating weakness: Fitch

• Says emerging Asian sovereigns with biggest external funding needs are modestly reducing vulnerability

Rating agency Fitch projects Sri Lanka (BB-/Stable) will cut its gross external funding requirement (GXFR) the most between 2012 and 2014, relative to its foreign reserves, and warned its high levels of GXFR remains a credit and rating weakness.
A year after the “taper tantrum,” emerging Asian sovereigns with the biggest external funding needs are generally reducing their degree of external vulnerability, although only modestly in most cases, it observed in a statement.
India (BBB-/Stable) is projected to have a lower GXFR than Indonesia (BBB-/Stable) in 2015, and has seen a greater reduction in its funding need.
“India is likely to have a lower funding need than the average for the 10 biggest non-Asian emerging economies by 2015,” Fitch observed.
Fitch expects Vietnam will see the biggest projected increase in its GXFR, relative to reserves, although this is not a major credit concern as the country’s funding need is negative, reflecting a strong swing into current-account surplus since 2011. Vietnam is rated B+/Positive.
The chart excludes Mongolia, with a GXFR projected at 249% of official reserves for 2015. Mongolia’s B+/Negative rating reflects the pressure on the sovereign credit profile from the strain on external liquidity resulting from exceptionally loose macroeconomic policy settings.
The current trends in the data are reflected in the ratings. Containing GXFR is supporting the ratings for sovereigns in those countries with higher external funding needs – including India, Indonesia and Sri Lanka.
Fitch Ratings expects external liquidity will become an increasingly important rating driver for emerging Asian sovereigns over the next 24 months as the Fed gradually withdraws monetary accommodation.
Fitch expects policy management by emerging Asian sovereigns will be of central importance in determining their credit outlook. A less generous external funding environment is likely to lead to continued pressure on sovereigns to run relatively tight policy to compress imports and reduce the need for foreign capital. Structural reform could help to bolster external competitiveness and raise exports, but this may be difficult to implement over the short to medium term.