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Cablegate: Sri Lankan Initial Sovereign Rating Sub-

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 COLOMBO 002069

SIPDIS

SENSITIVE

STATE FOR SA/INS M GOWER; MCC FOR D NASSIRY AND E BURKE

E.O 12958: N/A
TAGS: ECON EFIN CE ECONOMICS
SUBJECT: Sri Lankan Initial Sovereign Rating Sub-
Investment, but Consistent with Expectations

1. (SBU) Summary: Sri Lanka received its first sovereign
rating on December 8. Fitch Ratings assigned Sri Lanka a
?BB minus? rating (sub-investment grade) noting that all
the long term rating outlooks were stable. Standard and
Poor's rating was slightly lower at 'B plus.' The sub-
investment grade ratings were related to continuing
uncertainty surrounding Sri Lanka's political situation,
the peace process and its relatively high budget deficit.
Nonetheless, President Rajapakse used his maiden budget
speech on December 8 as the occasion to announce the scores
and Treasury Secretary PB Jayasundera indicated the country
would possibly use the ratings to pursue a foreign bond
issue. End Summary.

2. (U) On December 8, Fitch Ratings assigned Sri Lanka long
term foreign and local currency ratings of 'BB minus.'
Fitch also assigned the country a short term foreign
currency rating of 'B' and a country ceiling of 'BB minus.'
Fitch said in a rating action commentary that all the long-
term rating outlooks are stable. 'BB minus' and 'B' ratings
are below investment grade. The 'BB minus' rating is the
same rating assigned to Indonesia, Turkey and Vietnam. It
was lower than neighboring India's BB+ rating. Fitch
cited Sri Lanka's impeccable sovereign debt service record
(due to heavy reliance on concessional, long-term debt) as
a key support for the rating. Paul Rawkins, Senior
Director in Fitch's Sovereign team said in a statement that
Sri Lanka has proved resilient to adverse shocks over a
long period of time.

3. (U) Fitch cited the fragile security situation and weak
public finances as the key constraints on the ratings. The
rating takes into account the potentially volatile
political situation and expectations about the ceasefire
agreement. Were violence to become more widespread, Fitch
warned, the adverse impacts on economic climate would bring
downward pressure on Sri Lanka?s ratings. Fitch also noted
that weak coalition governments have impeded fiscal
consolidation.

4. (U) Standard and Poor's issued Sri Lanka a 'B plus'
rating and also noted that the near-term outlook is stable.
Standard Poor's highlighted the GSL's high debt level, weak
revenue mobilization and continued security concerns as the
principal sources of risk faced by investors in Sri Lanka.

5. (U) Sri Lanka had also requested a rating from Moody's
Investor Services, but their score has not yet been
announced (Note: the credit ratings are done at the
Government's request and 'belong' to the GSL. It is the
GSL that decides whether or not to make the scores public.
End Note).

6. (SBU) Citibank provided advisory services to the
Government on the rating. Kapila Jayawardena, CEO of
Citibank NA, told EconFSN that the Government was aware
that it would not get an investment grade grading (BBB or
above) but should be happy with the current rating around
'BB minus.' He said that Sri Lanka had been conspicuous by
not having an international rating. He also hoped that the
rating would prompt the GSL to instill greater fiscal
discipline as a future downgrade in its credit rating would
be politically sensitive. Jayawardena further suggested
that the rating would increase both Sri Lankan Government
and business opportunities to seek funding in international
markets.

7. (U) Analysts widely expected Sri Lanka to use the rating
to seek capital on the international market at better rates
than the prevailing 11 percent domestic rate. At a 'BB
Minus' rating, Sri Lanka might see rates around LIBOR plus
300 basis points (around 7 to 7.5 percent) in the
international markets. Speaking to reporters, Treasury
Secretary PB Jayasundera noted ''this is a positive step

SIPDIS
toward capital market development and I hope our corporates
will make use of it. The government doesn't have ambitious
plans for excessive borrowing, but the rating enables us to
look for slightly wider markets, especially to mobilize
global funds belonging to Sri Lankans.''

8. (SBU) Comment: Post met with the three agencies during
their initial visits at the request of both Citibank and
the GSL. We see this as a positive move on the part of the
GSL, as it opens Sri Lankan finances yet further to
international scrutiny. Having used the budget speech as
the venue for announcing the ratings, the President
inherently linked the country's fiscal situation with its
international funding prospects. These ratings, in
addition to the GSL's interest in Millennium Challenge
Account funding, will give reform-minded, growth-oriented
camps more ammunition to use when confronting the GSL on
its tendency toward government largesse. End Comment
LUNSTEAD

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