Fiscal and liquidity challenges to intensify for non-investment grade sovereigns: Moody’s

• Expects non-investment-grade sovereigns’ debt-to-GDP ratios to jump by an average of 13% by end-2020
• Moody’s downgraded Sri Lanka’s sovereign rating by two notches to Caa1, from B2, on heightened refinancing risks

Fiscal and liquidity challenges facing non-investment-grade sovereigns have intensified in the context of uneven global economic recovery caused by the pandemic, with many emerging and frontier economies not recovering to pre-pandemic levels until 2022 at the earliest, pressuring their credit fundamentals, according to Moody’s Investors Service. 

The rating agency said the pace of recovery would largely depend on the “capacity for further policy support while dealing with higher debt” and “the structure of the economy in terms of drivers of the economic rebound”. 

Moody’s in September downgraded Sri Lanka’s sovereign rating by two notches to Caa1, from B2, largely over heightened refinancing risks due to COVID-19, which the government rubbished as a flawed reading of the country’s economy.

Sri Lanka has dealt with the economic fallout of the pandemic relatively well, with the government and Central Bank stepping into support businesses and individuals with stimulus packages, rate cuts and moratoria.  
Budget 2021 presented in November was largely welcomed by the country’s business community for its commitment towards policy stability, particularly the tax policy.

Moody’s in its latest report issued yesterday, covering mostly the emerging and frontier economies in Latin America, Africa and the Middle East, Asia Pacific and Emerging Europe, said that most regions would see a 10 to 20 percent of GDP rise in debt by end-2021, compared to 2019. 

“Globally, we expect non-investment-grade sovereigns’ debt-to-GDP ratios to jump by an average of 13 percentage points by the end of 2020 and remain at record-high levels. Only about 30 percent will record a decline in their debt burdens in 2021, reflecting both weaker growth dynamics and increased fiscal pressures,” Moody’s analyst Michael S. Higgins said.

Meanwhile, Moody’s reminded these sovereigns that the International Monetary Fund (IMF) has made available an emergency financing facility to the tune of US $ 100 billion for the most vulnerable, which Sri Lanka hasn’t so far subscribed to. 

All three global rating agencies have downgraded Sri Lanka’s sovereign rating over the country’s higher indebtedness and repayment risks, which have been exacerbated by the COVID-19 crisis. 

However, the Sri Lankan government remains confident of honouring all its external obligations. The Central Bank says it is on an alternate policy path for economic growth, for which the rating agencies haven’t given due recognition.