Coalition government with two third majority credit positive: Moody’s

Published : 10:31 am  August 26, 2015 | No comments so far |  | 


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The establishment of a coalition government with more than a two thirds parliamentary majority will be credit positive for Sri Lanka, global rating agency Moody’s Investor Services said in a recent report.

Moody’s said in such a set up the government can easily enact policies that revive growth and address its large fiscal burden.
“This would address flagging business confidence and slowing foreign investment flows of the past six months,” Moody’s said.
Sri Lanka’s high government debt burden, which stands at 76 percent of GDP is higher than similarly rated B1/Stable peers.

Last Friday, United National Party (UNP) which more than doubled its seats in Parliament to 106, signed a memorandum of understand with the second largest political party in Parliament Sri Lanka Freedom Party (SLFP) for the establishment of a coalition government.
Before the August 17 elections, UNP and its allies controlled 26 percent of the seats in parliament and this lack of parliamentary majority slowed the policymaking process.

Moody’s said in an environment of slowing global growth, political gridlock in the first half of this year dampened business confidence, leading to reversal of capital flows.
“Had these conditions persisted, they would likely have slowed domestic investment growth as well.”

Net portfolio investment into Sri Lanka declined in the first quarter of this year, partly reflecting market pessimism about the direction of policymaking and its effect on Sri Lanka’s macroeconomic prospects.

“As a small economy with a current account deficit, a continued decline in capital inflows would have hurt Sri Lanka’s balance of payments position with the potential to negatively affect domestic growth as well,” Moody’s said.

The interim government in February announced a revised 2015 budget targeting a fiscal deficit of 4.4 percent of GDP and a 14.1 percent growth in overall government revenues. Government revenues increased by 18.4 percent over the first five months of the year, driven primarily by an improvement in import duties and excise tax collection, and dividends from state-owned enterprises.
“Meeting the deficit target will depend on whether government expenditures, targeted to increase by 10.4% to fund higher healthcare, education, public sector salaries and pension spending, are kept in check,” Moody’s said.

The rating agency also said that the government policies are increasingly important in addressing Sri Lanka’s macroeconomic challenges, which stem from high government debt, subdued international trade, and the potential for capital outflows from emerging markets ahead of an increase in interest rates by the US Federal Reserve and China’s slowing economy.

Moody’s noted that if the current structure of government limits the negative effect that of political differences had on business confidence during the time of the interim government, the economic outlook is set to improve.