Sri Lanka’s instability has led to massive portfolio outflows: Fitch Ratings

By Sanath Nanayakkare

Sri Lanka’s economic and social instability have led to massive portfolio outflows and weakened disposable incomes, Fitch Ratings said yesterday in its quarterly frontier markets recap.

“Many Asian frontier markets are net energy importers. South Asia is particularly exposed to the commodity price shock, with Sri Lanka and Pakistan already facing external and fiscal challenges as well as high inflation. There are subsidy spending pressures in frontier markets such as Sri Lanka and revenue growth could be more subdued to the extent commodity prices dampen economic performance.” Fitch said.

The rating agency also said that Asian frontier markets debt has risen only slightly while Sri Lanka is on an explosive debt path.

“Sri Lanka’s low foreign exchange reserves continue to pressure imports, and the unprecedented spike in interest rates will raise borrowing costs and weaken financial flexibility,” it noted.

“Central banks in frontier markets are taking further steps to tighten monetary policy, raising interest rates at an unprecedented pace. As consumer and producer inflation rates keep rising and currencies continue to depreciate, borrowing costs have increased to levels not seen in a long time,” it stated.

Fitch Ratings had earlier said that some rated Sri Lankan corporates were more affected by the challenging macroeconomic environment stemming from the Sri Lanka sovereign’s distressed credit profile.

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