Moody’s assesses Sri Lanka’s geopolitical risks to be “very low” despite tensions

• “We do not consider geopolitical risk to be material to Sri Lanka’s credit profile”- Moody’s
• But says SL remains highly vulnerable to the tightening of external financing conditions
• Moody’s last month downgraded SL’s sovereign rating by two notches to Caa1

As the domestic political landscape getting fired up with the arrival of US Secretary of State Mike Pompeo as part of his South Asian tour, and some commentators raising concerns that Sri Lanka has become an indirect victim of the US-China trade war, Moody’s Investors Services yesterday said Sri Lanka’s geo political risk remains “very low.”

“We assess geopolitical risk to be very low. Although tensions have arisen at times with neighboring India (Baa3 negative) and China, for instance over the terms of China’s increasing investment presence in Sri Lanka, we do not consider geopolitical risk to be material to Sri Lanka’s credit profile”, Moody’s said in an in-depth analysis of the country’s risk factors following the sovereign downgrade. 

‘Susceptibility to event risk,’ which assesses the geopolitical risks facing a sovereign nation is part of three other rating factors Moody’s evaluates in arriving at its rating decisions. The other rating factors are: economic strength, institutions and governance strength and fiscal strength. 

Moody’s on September 28 downgraded Sri Lanka’s sovereign rating by an unusual two notches to Caa1 from B with the outlook changing to Stable amid concerns regarding the country’s weakening institutions, elevated external re-financing risks and stretched fiscal deficit. 

The government called the rating action ill-timed and unwarranted given the recent positive developments in the economy. 

The rating action also came just a few days before the country settled a billion dollar sovereign bond, partly financed through reserves.

Meanwhile, Moody’s in its latest report acknowledged that the current government carrying a strong mandate would smoothen the reform agenda, although maintaining the reform momentum could become a challenge given the bleaker economic outlook caused by the pandemic. 

“Our baseline scenario under the current government, with a unified presidency and parliament, is that there is a reduced risk that disagreements between the government and Opposition stymie the government’s policy agenda.” 

“Nevertheless, achieving reform momentum could still be difficult with a bleaker economic outlook, and the focus of policy reforms, or the slow implementation thereof, is unlikely to meaningfully address Sri Lanka’s credit vulnerabilities,” the rating agency noted.  

Moody’s however reiterated that Sri Lanka remains highly vulnerable to the tightening external financing conditions, given the country’s reliance on external funding and low reserves, which has further been challenged by the pandemic.“Sri Lanka’s high vulnerability to tightening in external and domestic financing conditions, given large borrowing needs, reliance on external funding and low reserves adequacy, dominates the risks that could abruptly lead to further negative credit pressures.”  With the settlement of the sovereign bond early this month, Sri Lanka has less than US$ 500 million in foreign currency liabilities due for the remainder of the year, a figure which alleviates the external pressure to a certain degree.  However, the country on average has US$ 4- 4.5 billion in external debt repayment due every year from 2021 through 2025, Moody’s data showed.