Emirates’ pullout may affect foreign investments

The withdrawal of Emirates, the national carrier of the UAE, from SriLankan will not create a panic situation for the airline but will reflect badly on the country’s image as a foreign investment destination, according to a senior executive at international credit rating agency Fitch.

“We don’t see any need to revise the sovereign rating of Sri Lanka because it is a dispute between Emirates and the Sri Lankan Government, the two stakeholders. Sri Lanka has a liberal economic environment and the main problem facing the country is the fight against inflation and terrorism.

“Emirates has been a leading foreign investor in SriLankan and its withdrawal, following a dispute with the political leadership, is viewed curiously around the world,” said Chanaka Wickramasuriya, country head of international credit rating agency Fitch.

“Emirates withdrawing from SriLankan is not good news for the country’s image as an investment destination. However, there is no need to panic because other airlines would be interested in managing the airline for a management fee. A major strength of SriLankan Airlines is the number of landing rights it has in many countries. It is not easy to get landing rights for airlines. If required, a consortium of Sri Lankan banks can buy the Emirates stake and cover the liabilities with specially structured loans,” he said. Unlike other airlines, Emirates invested money and managed the airline, he said.

“While Emirates invested money in the airline and obtained the management rights, other airlines may be ready to run it for a management fee. The authorities should examine whether the Emirates-SriLankan management contract has been violated in any way and rectify the mistakes, if any, in the next contract.” He added that the privatisation programme in Sri Lanka has been successful in certain sectors – telecoms, ports and infrastructure.

Chanaka said Singapore Port was interested in the port management and the flow of investment from the Middle East had not been significant. “The expansion of the Bhandaranaike International Airport is funded by the government and a new airport planned in the southern part of Sri Lanka will also be a government private sector project,” he said.

In April last year, Fitch Ratings affirmed Sri Lanka’s foreign and local currency issuer default ratings (IDRs) of BB- (BB minus) with a negative outlook. The country ceiling is affirmed at BB- (BB minus) and the short-term foreign currency rating at B. The outlook on Sri Lanka’s sovereign rating was revised to negative in April 2006 in response to concerns that the deterioration in the security situation threatened to adversely affect the economic performance and sovereign creditworthiness.

“The affirmation of Sri Lanka’s BB – (BB minus) ratings acknowledges that the feared adverse impact on the economy and sovereign creditworthiness has yet to materialise” said Paul Rawkins, Senior Director in Fitch’s sovereign team, “but Fitch judges that the domestic security situation continues to pose risks to economic stability and growth and hence the negative outlook remains warranted.”

The economy has been expanding at its fastest rate for more than two decades, underpinned by rising domestic and foreign investment, as well as record inflows of remittances ensuring that inflation is brought back towards single digit level. This is essential in Fitch’s opinion for sustaining economic growth and reducing the government’s debt servicing costs. Over the medium term, concerted fiscal consolidation is required to reduce the vulnerability of the economy and public finances to adverse shocks and to smooth the transition to less concessional sources of fiscal and external funding. However, the government’s target of reducing public debt to 76 per cent of GDP by 2010 is at risk if the security situation were to affect economic growth and delay planned reductions in the budget deficit from last year’s level of 8.4 per cent of the GDP.

Consequently, Sri Lanka’s sovereign ratings remain under downward pressure given the uncertain outlook for the security situation. However, a further deterioration in the security situation in the nation would lead to a downgrade of the sovereign ratings.