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Fitch Ratings, which last week affirmed Sri Lanka’s Long-Term Foreign and Local Currency Issuer Default Ratings at ‘BB-‘ said that although it expects Sri Lanka will succeed in rebuilding international reserves to USD10 billion by the end of 2015 there are risks that may derail this strategy, including a potential rise in domestic political uncertainty and an adverse shift in investor sentiment, which led Sri Lanka to abort plans to borrow in international capital markets in 1Q15.

“Fitch expects that Sri Lanka will succeed in rebuilding international reserves to USD10 billion by the end of 2015 through a combination of renewed borrowing on international capital markets, the exercise of foreign currency swaps with the Indian and Chinese central banks, and onshore borrowing through Sri Lanka Development Bonds. Nonetheless, there are risks that may derail this strategy, including a potential rise in domestic political uncertainty and an adverse shift in investor sentiment, which led Sri Lanka to abort plans to borrow in international capital markets in 1Q15,” the rating agency said in a statement.

It further noted that falling oil prices should play to Sri Lanka’s advantage, helping to contain the current account deficit, as should strong remittances and tourism, while net non-resident inflows into the domestic debt market have remained positive.
“Even so, heavy external debt repayments have led to a drawdown of international reserves from USD10 billion at end-April 2014 to less than USD7 billion at end-March 2015, raising concerns about external liquidity, particularly in the face of expected monetary tightening by the US Federal Reserve,” Fitch cautioned.

The issue ratings on Sri Lanka’s senior unsecured foreign and local currency bonds are also affirmed at ‘BB-‘. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘BB-‘ and the Short-Term Foreign Currency IDR at ‘B’.