Moody’s places SL’s rating under review for possible downgrade

• But any action hinges on how best govt. refinances debt
• Says refinancing ISB maturities on international markets would come at considerable costs
• Works out SL’s external debt repayments at US$ 4.0bn per annum
• Projects budget deficit to stretch to over 8% of GDP due to higher cost of debt
• Economy to grow by 1.5% with risks skewed to the downside
• Projects government’s debt burden to rise to close to 100% of GDP

Moody’s Investors Service yesterday placed Sri Lanka’s sovereign credit rating under review for possible downgrade due to economic risks building up from the new coronavirus, but said any rating action would be three or more months away and will depend on how the government refinances its debt and keeps macro-fundamentals less than threatened. 

Moody’s became the first rating agency to spell caution on the country’s rating, but Fitch also said it was reviewing its country ratings adding that any rating action would be relative to the global and specifically the regional context as no country is spared from the pandemic. 

Moody’s has a B2 rating on Sri Lankan sovereign. 

Moody’s expressed its worries over Sri Lanka’s ability to refinance its foreign debt amid tighter international capital markets and the country’s humble official foreign reserves. 

“The decision to place Sri Lanka’s ratings on review for downgrade is prompted by Moody’s assessment that the acute tightening in global financing conditions, fall in export revenue, and sharp slowdown in GDP growth as a result of the global coronavirus outbreak exacerbate Sri Lanka’s existing government liquidity and external vulnerability risks, raising risks of heightened financing stress and macroeconomic instability. 

Moreover, the economic and financial shock will further dim medium-term prospects for reforms that would meaningfully strengthen Sri Lanka’s fiscal and external position,” the rating agency said in a note yesterday after its rating committee was called to discuss the country’s rating early this week.

Moody’s worked out Sri Lanka’s external debt repayments at US$  4.0 billion per annum on average between 2020 and 2025 with international sovereign bond (ISB) maturities accounting for sizeable portion of this. 

This includes upcoming payments of US$ 1.0 billion each in October 2020 and July 2021. 
Since the beginning of March, spreads of Sri Lankan ISBs over US treasuries have widened sharply to around 1,600 basis points indicating significantly impaired market access.

“In the current market conditions, refinancing these maturities on international markets would come at considerable costs,” Moody’s said. 

However Treasury Secretary, S.R. Attygalle recently said Sri Lanka would repay all its debt and has reserves exceeding US$ 7.0 billion. 

By March 31, Sri Lanka had its estimated gross official reserves at US$ 7.5 billion, the latest Central Bank data showed. As tapping international capital markets remains elusive, Moody’s anticipates Sri Lanka may reorient its external funding to international and bilateral creditors. 

Sri Lanka has so far received a concessionary loan worth US$ 500 million from China upon a request made by the Sri Lankan government in its efforts to combat the virus while another US$ 700 million concessionary loan from China Development Bank is due.The World Bank has also extended US$ 128 million credit. 

Besides, Sri Lanka may also receive relief on some of its external debt as G20 this week agreed to hold off on some debt given to poorer nations hit by coronavirus.  

Meanwhile, the International Monetary Fund is also said to be reviewing Sri Lanka’s request for assistance from its Rapid Credit Facility or to convert its current extended fund facility to a rapid facility. 

The ability of the country to secure debt at manageable cost and in a way that does not further weaken its external position and threaten macro-economic stability will result in no negative rating action.

Softlogic Capital last week said they believe Sri Lanka could secure US$ 2.5 to US$ 3.0 billion through various swap facilities, grants, bi-lateral borrowings and government-to-government borrowings in 2020, which could arrest the pressure on local currency. 

Moody’s however projected Sri Lanka’s budget deficit to stretch to over 8.0 percent of GDP due to higher cost of debt, lower revenue, and higher expenditure expensed to support the economy while the economy to grow by 1.5 percent in 2020 with risks skewed to the downside. 

“Combined with slower nominal GDP growth and a weaker exchange rate, the government’s debt burden will rise close to 100 percent of GDP. Debt affordability, already one of the weakest amongst the sovereigns which Moody’s rates, will worsen further with interest payments comprising more than 50 percent of government revenue in 2020-21”, the rating agency added. 

As Sri Lanka’s early measures to stem the  virus pread have largely been successful, the government is now drawing plans and strict guidelines to re-open the economy from next week on a staggered basis, which could establish semi-normalcy, mitigating a large scale damage to the economy.