Fitch downgrades Sri Lanka’s sovereign rating to ‘CC’

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Colombo: Fitch has downgraded Sri Lanka’s sovereign rating to ‘CC’ from ‘CCC’, saying there is an increased probability of a default in coming months in light of the country’s worsening external liquidity position underscored by a drop in foreign-exchange reserves.

The New-York based rating agency said it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.

“Obligations include two international sovereign bonds of USD 500 million due in January 2022 and USD 1 billion due in July 2022, it said.

“The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency,” it said in a statement on Friday.

Fitch said Sri Lanka’s foreign-exchange reserves have declined much faster than it expected, owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka.

Foreign exchange reserves have declined by about USD 2 billion since August, falling to USD1.6 billion at end-November, equivalent to less than one month of current external payments (CXP). This represents a drop in foreign-currency reserves of about USD 4 billion since end-2020, it said.

“The government also faces foreign-currency debt service payments, including principal and interest, of USD6.9 billion in 2022, equivalent to nearly 430 per cent of official gross international reserves as of November 2021. Cumulative foreign-currency debt service, including interest and principal, amounts to about USD26 billion from 2022 through to 2026,” it said.

The latest Fitch statement came after Finance Minister Basil Rajapaksa assured parliament last week that the government was confident of meeting external debt payments when they fall due.

Fitch says a currency swap facility with the People’s Bank of China (PBOC) could boost reserves by up to CNY 10 billion (USD 1.5 billion equivalent).

Even with that and sources of financing likely coming from an economic support package from India, which contains a swap facility under the South Asian Association for Regional Cooperation currency framework of USD 400 million, a swap facility with the Qatar Central Bank, remittances securitisation and a revolving credit facility with the Bank of China Limited, foreign exchange reserves are likely to remain under pressure.

The Sri Lankan rupee/US dollar spot exchange rate depreciated by 7-8 per cent since end-2020, but due to central bank intervention to support the currency, had caused a decline in reserves, it said.

In order to tackle the reserves crisis, the island nation has curtailed imports leading to shortages of essentials.

The island’s only refinery was ordered to be shut mid-November due to shortage of foreign currency to import crude oil.

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