S&P Global lowers Sri Lanka’s sovereign rating to ‘CCC+’; outlook Stable

• Says downgrade due to rise in SL’s risks to debt servicing capacity 
• Forecasts economy to contract sharply by 5.3% in 2020

S&P Global Ratings yesterday lowered its long-term foreign and local currency sovereign credit ratings on Sri Lanka to ‘CCC+’, from ‘B-’, in tandem with the other two rating agencies, Moody’s and Fitch, which have already downgraded Sri Lanka over accelerated external financing risk.

S&P also lowered its short-term foreign and local currency credit ratings to ‘C’, from ‘B’. The transfer and convertibility assessment is revised to ‘CCC+’, from ‘B-’. The outlook is Stable.

However, the outlook on Sri Lanka’s rating was kept at ‘Stable’, which reflects that, at this lower rating level, risks to Sri Lanka are relatively balanced over the next 12 months. “Risk of external deterioration is partially offset by accommodative policies that are likely to boost domestic demand recovery,” S&P said. “We lowered our ratings on Sri Lanka based on our assessment that risks to debt servicing capacity have risen, as the government’s access to external financing has become increasingly dependent on favourable business, economic and financial conditions.

The downgrade stems in part from the impact of COVID-19, which has significantly narrowed the government’s fiscal space and its capacity to generate earnings through sectors such as tourism. The latest expansionary budget measures are likely to further weaken the government’s fiscal position. High fiscal deficits and excessive domestic liquidity will put downward pressure on the exchange rate and worsen the risks associated with the government’s already-high debt burden,” it added.

S&P forecasts the economy to contract sharply by 5.3 percent in 2020, largely due to the COVID-19 pandemic.

But the rating agency expects the real GDP growth to accelerate to 4.3 percent in 2021, albeit from a low base and average 4.5 percent in 2021-2023. Sri Lanka has around US $ 4 billion of debt repayments due annually until 2025. Its foreign exchange reserves stand at under US $ 6 billion. S&P expects Sri Lanka’s fiscal deficit to remain elevated at 10.2 percent of gross domestic product (GDP) in 2021 and narrow gradually to 8.4 percent in 2023, while net general government debt will exceed 100 percent of GDP in 2021 and remain high over the next five years. Meanwhile, the rating agency noted that while the current administration’s clear victory in August’s parliamentary election is likely to ease uncertainty over policy direction, further consolidation of power in the executive may increase institutional risks. “This could affect the stability of the legislature or the judiciary system and in turn, hit policy predictability and business confidence,” it added.