Mumbai, April 27:

Standard and Poor’s (S&P) today reduced its credit outlook on Sri Lanka to negative, citing war fears due to escalation of hostilities between the government and the Liberation Tigers of Tamil Eelam (LTTE).

The global rating agency said a resumption of full-scale hostilities could have negative implications for the country’s already stressed fiscal and debt position, and may impair its previously adequate level of external balances. The latest outbreak involved an assassination attempt on the army chief attributed to rebels and was followed by government reprisal shelling of LTTE-held areas.

Standard and Poor’s said the recent events signalled a qualitative escalation in the ongoing conflict with operations on both sides moving increasingly closer to concerted military action. These events follow a unilateral pullout by the LTTE from the Geneva peace talks scheduled for this week, which aimed to shore up the implementation of the ceasefire and ease the rising level of violence.

“The ratings on Sri Lanka are vulnerable due to the co-untry’s high government de-bt and ongoing large fiscal deficits,” said S&P’s credit analyst Agost Benard. Bena-rd said Sri Lanka also faced the threat to external viability should a return to allout war result in reduced growth and investor confidence and necessitate higher government expenditure.

Sri Lanka’s fiscal flexibility is seriously hampered by its debt level of an estimated 92 per cent of 2005 gross domestic product, said the rating agency. According to the agency, the resumption of all-out hostilities would put additional pressure on government expenditures, which remain burdened by a large public sector, loss-making enterprises and extensive subsidies. Revenue collection, already one of the weakest among rated sovereigns at 15.4 per cent of gross domestic product, would also likely deteriorate as economic growth and investor confidence falter, it added.

“Taken together, these factors could further exacerbate fiscal deficits that are routinely at 8-10 per cent of gross domestic product annually, with adverse implications for Sri Lanka’s debt.”