In response to the current economic crisis in Sri Lanka, Fitch Rating has lowered the long-term default rating of the country’s foreign currency issuers (IDRs) to âCCâ, instead of âCCCâ, a move that reflects the dire state of Colombo’s finances.
“The downgrade reflects our view of an increased likelihood of a default event in the coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a decline in foreign exchange reserves against high external debt payments and limited financing inflows The severity of financial strains is illustrated by high yields on government bonds and downward pressure on the currency, âthe report notes.
The Central Bank of Sri Lanka called the move “reckless” and urged investors “not to be deterred by such actions”.
Reckless action of #Evaluation agencies continue despite being informed of the impending #influx as indicated in the semi-annual roadmap. #Investors are urged not to be deterred by such action. The evolution of collections will be announced during this week. @ Reviews of fitch #Roadmap #SriLanka pic.twitter.com/afq8hmDiZU
– CBSL (@CBSL) December 18, 2021
Free-fall foreign exchange reserves
The report further states that Sri Lanka’s plummeting foreign exchange reserves have declined by around $ 2 billion since August, falling to $ 1.6 billion at the end of November, which equates to less than a month of payments. current exteriors. This decrease is explained by the increase in the import bill and the intervention in foreign currency of the Central Bank of Sri Lanka. Since the end of 2020, Sri Lanka’s foreign exchange reserves have fallen by around $ 4 billion.
Commenting on Sri Lanka’s debt payments, Fitch notes that “it will be difficult for the government to meet its external debt obligations in 2022 and 2023 without new sources of external financing.” Sri Lanka is required to repay two sovereign bonds valued at $ 500 million and is expected to repay two sovereign bonds valued at $ 500 million by January 2022 and $ 1 billion maturing in July 2022.
Sri Lanka also faces foreign currency debt service payments of USD 6.9 billion in 2022, or nearly 430% of official gross international reserves as of November 2021. Fitch notes that debt servicing cumulative foreign exchange, including interest and principal, amounts to approximately USD 26 billion from 2022 to 2026. Fitch adds that âthe timing and availability of external resources is not clear and may not be readily available for debt service â.
Addressing the potential support Sri Lanka could get from China and India, Fitch notes that âeven though all of these sources are secure, we believe it will be difficult for the government to maintain sufficient external liquidity to allow a uninterrupted debt service in 2022 â.
Predictions that get worse
Fitch also predicts that Sri Lanka’s economic performance will weaken in 2022, as “the difficult external position and pressure on exchange rates will have spillover effects on economic activity.”
They add that:
âForeign exchange shortages in 2021 have hampered food and fuel imports, and continued external liquidity strain could exacerbate supply shortages, hurting economic activity. We expect growth to slow to 2.0% in 2022, from around 3.6% in 2021, before falling back to 4.3% in 2023, partly due to base effects and gradual easing. domestic pressures, although downside risks remain to our forecasts â.
They also detail concerns which include the country’s persistent current account deficit which has resulted in “downward pressure on the exchange rate”. Fitch estimates Sri Lanka’s deficit will widen to around 5.7% of GDP in 2021 and expects it to stay at around 4.0% in 2022, before falling to 2.1% by then 2023.
They add :
“A drop in remittances, a weak recovery in tourism and an increase in imports have contributed to the widening of the current account deficit.”
Sri Lanka’s tourism outlook has been hampered by the emergence of the new COVID variant, Omicron.
The report further predicts that public debt will continue to grow to around “110% of GDP by 2022, and will continue to rise below our benchmark, in the absence of major fiscal consolidation.” Fitch adds that “Sri Lanka is unlikely to meet its 2025 public debt reduction target of around 89% of GDP or reduce the budget deficit to 4.8% of GDP.”
“Rising interest payments are one of the main drivers of the worsening deficit and the interest-to-income ratio of around 95.0% is well above the peer median of 11.3%,” note -they.
Turn to the IMF
While the Central Bank of Sri Lanka and government officials have rejected calls to turn to the International Monetary Fund, Fitch notes that while this would unlock multilateral funding, it “may well suggest restructuring to ensure the sustainability of the debt â.
In their statement, Sri Lankan officials and the central bank governor repeatedly denounced the suggestion, saying it would undermine Sri Lanka’s sovereignty.
Read the full report here.