S&P affirms Sri Lanka’s ‘Selective Default’ sovereign rating

• Says SL’s long-term local currency rating ‘CCC-’ could be lowered if there are indications of non-payment or restructuring of rupee debt

S&P Global Ratings yesterday affirmed its long-term and short-term foreign currency sovereign credit ratings on Sri Lanka at ‘Selective Default’ (SD).

At the same time, it affirmed the ‘CCC-’ long-term and ‘C’ short-term local currency sovereign ratings. The outlook on the long-term local currency rating remains negative.

“We could lower the long-term local currency ratings on Sri Lanka if there are indications of non-payment or restructuring of Sri Lankan rupee-denominated obligations,” S&P said.

The rating agency said the negative outlook on the long-term local currency rating reflects a high risk to commercial debt repayments over the next six months, in the context of Sri Lanka’s economic, external and fiscal pressures.

“Our ratings on Sri Lanka reflect the government’s continued non-service of its international sovereign bonds (ISBs) as well as deep underlying fiscal, economic and external weaknesses,” it said. “The Sri Lankan government is in comprehensive negotiations to restructure its foreign currency obligations. Once an agreement is made and timely service of all commercial foreign currency obligations resumes, we may raise the foreign currency ratings on Sri Lanka to reflect the sovereign’s underlying creditworthiness,” it added. “Sri Lanka has endured an extended period of extremely challenging macroeconomic conditions, including a severe deterioration in public finances, economic growth and external liquidity. These conditions are beginning to stabilise but we anticipate that a meaningful recovery will only begin after 2023,” it further said. S&P expects the Sri Lankan economy to contract by about 1.8 percent this year, compared with a 7.8 percent contraction in 2022, as activity gradually stabilises. It also forecasted GDP to return to expansion in 2024, at a growth rate of 1.5 percent.  “The government’s EFF agreement with the IMF sets the stage for major policy reforms over the next three to four years. If implemented, these reforms would help to restore Sri Lanka’s growth potential,” S&P said.

Meanwhile, the rating agency noted that Sri Lanka’s external profile has stabilised from deep crisis levels in 2022 and said resources would remain limited for the next one to two years as thin reserve buffers are gradually rebuilt.
“Sri Lanka’s public finances remain extremely weak. The adoption of revenue reforms, expenditure controls and faster nominal GDP growth will be necessary to significantly curtail the government’s large fiscal shortfall.

The government’s interest burden and debt stock remain unsustainable. Improvement in these will be partially dependent on the depth and breadth of debt restructuring agreements,” it added.