Sri Lanka’s economic prospects improve
The Government’s billion-dollar partnership with China to revive the loss-making Hambantota port will be credit positive for Sri Lanka and bolster investor confidence, an international ratings agency said yesterday.
Moody’s ratings agency said the 1.12 billion dollar transaction will boost Sri Lanka’s foreign exchange reserves and ease the government’s external liquidity position ahead of several large bond repayments between 2019 and 2022.
“Earnings from the Hambantota port stake sale will feed into the central bank’s foreign-exchange reserves, which will help bolster investor confidence and encourage future portfolio inflows,” Moody’s said in a report on Saturday’s deal.
The government sealed the deal with China Merchants Port Holdings to jointly run the Hambantota port which had accumulated a loss of 46.7 billion rupees since 2011.
The port was also bleeding another 9,100 million rupees annually to service its foreign debt to China.
The previous government had borrowed 1.5 billion dollars to build the port which the Chinese valued at 1.4 billion raising questions about huge kickbacks during the construction.
Prime Minister Ranil Wickremesinghe announced last week that he managed to secure a deal with China to take away the debt burden and also ensuring security concerns were fully addressed.
Sri Lanka’s Navy will be in charge of security at the port while the agreement with China Merchants will be in line with Sri Lankan law.
The Prime Minister said he also expected China Merchants to invest in excess of 300 million dollars initially on improving the Hambantota port.
“Development of the broader Hambantota port area will help bring in foreign direct investment, especially from China,” Moody’s noted.
The buildup of associated infrastructure surrounding the port can also help attract greater private-sector investments, it added.
“This, together with other ongoing development projects such as the Western Region Megapolis Plan and Colombo Financial City Project, will provide a stable source of financing for Sri Lanka’s external position and support economic growth.
“Closure of the long-pending deal also will allow the government to focus on key priorities, including advancing economic and structural reforms under its IMF program,” the international rating agency noted.
It noted that the transfer of a 70 percent stake in the port on a 99 year lease will allow the government to set aside earnings to repay its upcoming debt maturities and reduce its external debt, a key constraint on Sri Lanka’s credit quality.
“External debt maturities in 2019-22 total 13.8 billion dollars,” it said underscoring the huge debt burden passed onto the new administration which had borrowed from abroad at high rates during Mahinda Rajapaksa’s decade in power.
Economic challenges would remain for the elevated government debt and the need to borrow more.
“We expect the central bank to come close to its target, which would help support the sovereign’s credit quality,” Moody’s said.
“Moving forward, greater exchange-rate flexibility and more limited foreign-exchange interventions by the central bank would help preserve reserves,” Moody’s said.
It expected Sri Lanka’s external vulnerability indicator, which measures the ratio of external debt payments that are due over the next year to foreign-exchange reserves, to rise to about 183 percent in 2017 from around 150 percent in 2016. “Moving forward, greater exchange-rate flexibility and more limited foreign-exchange interventions by the central bank would help preserve reserves,” it added.