Fitch expects SL to meet all external debt maturities this year

• Points out govt. has secured funding from bilateral and multilateral channels and via swap lines 
• But stresses SL’s medium-term debt service challenges continue to remain substantial
• SL’s external debt obligations estimated at US $ 29bn between now and 2026
• Affirms SL’s Long-Term Foreign-Currency Issuer Default Rating at ‘CCC’

Fitch Ratings expects Sri Lanka’s government to meet its remaining external debt maturities for the rest of the year, including a US $ 1 billion International Sovereign Bond (ISB) maturing in July, with the partial easing off external liquidity pressures in recent months while the medium-term debt service challenges persist undermining the country’s debt sustainability.

The government recently secured project financing through various multilateral and bilateral channels, including the Asian Development Bank, Asian Infrastructure Investment Bank, China Development Bank and Export-Import Bank of Korea, as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework and People’s Bank of China, equivalent to US $ 400 million and US $ 1.5 billion, respectively. The planned IMF SDR allocation would also add US $ 780 million to the country’s foreign exchange reserves. 
However, the rating agency stressed that the country’s medium-term debt service challenges continue to remain substantial while posing risks to the sovereign’s debt repayment capacity.

Sri Lanka’s foreign-currency debt obligations were estimated at US $ 29 billion between now and 2026, while the country’s foreign exchange reserves stood at little over US $ 4 billion by end-May, down from US $ 4.5 billion at end-April, this year.

Fitch Ratings projected the country’s foreign-exchange reserves to improve to about US $ 4.5 billion by the end of this year, before declining to US $ 3.9 billion by end-2022. 

The government was yet to reveal its plans for meeting the country’s foreign currency debt-servicing requirements for 2022 in the medium term, while the government consistently downplayed any plans to seek programme financing from the IMF.

The current account deficit is expected to widen to 2.8 percent this year and narrow to 2.1 percent of GDP in 2022, on the assumptions of remittance flows remaining resilient in the period and recovery of the tourism sector from 2022.

Accordingly, Fitch Ratings this week affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC’, reflecting a challenging foreign currency sovereign external debt repayment burden over the medium term, low foreign exchange reserves and high and rising government debt that gives rise to sustainability risks.

Meanwhile, Fitch Rating expects the government to miss its 2025 target of reducing the government debt to 70 percent of GDP and narrowing the fiscal deficit to 4 percent of GDP.

The government debt reached 101 percent of GDP by end-2020, broadly in line with Fitch Rating’s forecast and it forecasted it to further expand to 108 percent by 2022. 

In 2020, the fiscal deficit also widened to 11.1 percent of GDP, from 9.6 percent in 2019, as the economic contraction led to a sharp fall in fiscal revenue. Fitch Ratings forecasted the fiscal deficit to remain elevated this year and in 2022 at 11.1 percent and 10.4 percent, respectively, above the government’s projections of 9.4 percent and 7.5 percent, respectively, under its growth-oriented strategy. 

Similarly, it also projected the revenue-to-GDP ratio to increase to 10.9 percent in 2021 and 11.1 percent in 2022, below the relevant authorities’ projections of 11.9 percent and 13 percent, respectively.

“The government’s fiscal consolidation strategy is based on a planned acceleration in GDP growth, underpinned by tax cuts, as opposed to direct revenue raising or expenditure measures, albeit supported by planned improvements in tax administration,” Fitch Ratings pointed out.

In particular, Fitch Ratings expressed concerns of the high interest-to-revenue ratio, which stood at around 71 percent in 2020, well above the CCC median of 13 percent. Further, the rating agency was also doubtful of the government’s targets to achieve primary surpluses from 2023 onwards, supported by a rather ‘optimistic’ annual GDP growth of 6 percent.