HONG KONG/SINGAPORE, November 24 (Fitch) Sri Lanka's 2014 budget highlights continuing success in gradual fiscal consolidation, says Fitch Ratings. It also signals a strong statement of commitment to medium-term debt reduction. The ability to maintain the fiscal consolidation trend provides support to Sri Lanka's' 'BB-'/Stable sovereign rating. At the same time, both its fiscal deficits and government debt burden still stand at relatively high levels. The government has managed to stick to its fiscal target of lowering its deficit to 5.8% of GDP in 2013, down from 6.4% in 2012. In its budget statement, the authorities are projecting the deficit to fall further - to 5% in 2014, 4.4% in 2015 and 3.8% in 2016. The debt burden is projected to decline from around 78% of GDP to 65%, though this would still be considerably higher than the current BB rated peer median of 35%. Risks to the path of sustained debt reduction arise from the efficacy of ongoing revenue reforms, and the high level of foreign currency debt. The medium-term fiscal consolidation plan is heavily reliant on raising the share of revenue in GDP. This could prove difficult to achieve, as efforts have already been undertaken to broaden the tax base, ensure greater compliance, and limit exemptions (since 2011), but are yet to demonstrate significantly positive benefits. Risks to achieving the revenue targets are also related to the high year-on-year GDP growth assumption of 7.5%-8% in the next few years. Lower actual growth would belie the authorities' expectation of a significant pick-up in tax revenue. The Sri Lankan government also has a significant amount of foreign currency debt. At around 33% of GDP this poses a risk to the medium-term goal of debt reduction should the Sri Lankan rupee unexpectedly weaken. In light of these risks, expenditure restraint will prove crucial for any medium-term fiscal consolidation effort. One positive development has been that state-owned enterprises have become more profitable than in earlier years. This limits a potential drain on public finances. Lower operating deficits by the government, in particular, ought to shore up domestic savings rates. To the extent these help in reducing external imbalances and lower a structural dependence on external borrowing, accompanying public sector reforms could prove credit supportive of the sovereign's credit profile. Contact: Art Woo Director Sovereigns +852 2263 9925 Thomas Rookmaaker Director Sovereigns +852 2263 9891 Aninda Mitra Senior Director Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.