23 December 2024 02:00 am Views - 201
Santa appears to have turned a lot more generous this Christmas for Sri Lanka which went through a lot of hardship during the last few years, as the country received another gift by way of its first sovereign credit rating upgrade.
On Friday, Fitch Ratings raised what it calls Sri Lanka’s long-term foreign currency Issuer Default Rating (IDR) to CCC+ after more than two and a half years since being under the disgraced club of Restricted Default (RD).
Fitch typically does not assign an Outlook to a sovereign with a rating of CCC+ or below.
The much anticipated rating action came soon after the country issued the new sovereign bonds, taking back the bonds in default. This was after the government received near unanimous consent from those who hold Sri Lanka issued International Sovereign Bonds, wrapping up more than a two year long arduous negotiations between various parties holding the bonds. This is a much needed step up for the country as this signals Sri Lanka’s official exit from the default status which it fell into in 2022, restoring confidence among its lending and investment partners, assuring that Sri Lanka will become a partner who will make good on its debt commitments.
Taking into social media platform X, Treasury Secretary Mahinda Siriwardena expressed similar sentiments.
“Whilst this rating upgrade is a crucial milestone, I firmly believe this is just the start of Sri Lanka’s journey towards prosperity for all, where everyone should make their utmost contribution, “ he said.
By wrapping up all forms of debt restructuring – local to official bilateral to commercial to sovereign bonds – Sri Lanka also became potentially the only country which regained solvency while turning around its economy in the fastest period of time. Getting back to solvency and economic turnaround was however mostly to do with the gradual restoration of foreign currency inflows from tourism and remittances, which Sri Lanka saw running extremely low coming into the crisis in early 2022 caused by the exogenous factors and also the normalising of energy and other commodities prices which soared due to the post pandemic supply chain bottlenecks, exacerbated by the war in Ukraine.
The Central Bank and many other economic pundits also misdiagnosed Sri Lanka’s run-away inflation at the time.
Meanwhile, Fitch has also upgraded Sri Lanka’s local-currency IDR CCC+ from CCC- to align with the Foreign Currency IDR as Fitch sees reduced risk of another local currency debt default after the completion of the bond restructuring and improved outlook for macro-economic indicators. Sri Lanka completed local currency debt restructuring in September 2023 when it exchanged its treasury bills and provisional advances held by the Central Bank into new treasury bonds and bills.
Sri Lanka has entered into agreements in principle with most of its commercial creditors including international banks for US$ 200 million and also with its official creditors, and Fitch said the latter is expected to be completed by the end of the year.
In their upgrade to Sri Lanka’s sovereign rating, Fitch considered the progress made in the external front with debt restructuring where the country has no foreign currency bond maturities until 2029. This provides the country with substantial upfront debt repayment relief.
It also recognised the recovering economy, cooler prices, improving banking sector matrices and the strong mandate received by the current government which assured the International Monetary Fund Programme continuity through its conclusion, as other reasons to warrant a rating upgrade. However, the rating agency pointed to the still high debt levels of the central government which is however expected to come down to 90 percent by 2028 and also the challenges in continuing on the fiscal reforms although they expect the revenue-to-GDP to exceed the IMF projection of 15 percent by 2026 from the current 11 percent in 2023.