SL urged to formulate credible fiscal policy to avoid further downgrade

• Fitch calls for well-thought-out policy on fiscal front for SL to tackle mounting external pressures
• Hopeful that fiscal policies will be brought to a corrective path after August parliamentary polls
• SL on average has US $ 4.3bn of debt service obligations per annum up to 2025
• This April, Fitch Ratings downgraded SL’s sovereign rating to ‘B-’, from ‘B’, with a Negative outlook

By Shabiya Ali Ahlam 
Sri Lanka may witness a further downgrade in its sovereign rating in the next cycle. However, a trigger can be avoided with the formulation of a credible fiscal policy that would help the country tackle the mounting external pressures, Fitch Ratings said. 

Cautioning that further weakness in the fiscal space and an increase in external financing pressures could place the country in a more challenging situation, Fitch Ratings stressed it is essential for the policymakers to come out with a well-thought-out policy on the fiscal front for Sri Lanka to be able to maintain or improve its current sovereign rating status. “The fiscal space is deteriorating. There is the parliamentary election in August, so we will have to wait and see. We will have to wait and see if after the elections the fiscal policies will be brought to a corrective path. If the policies worsen, that could trigger a downgrade for Sri Lanka,” said Fitch Ratings Associate Director Asia Pacific Sovereigns Sagarika Chandra.

She presented her comments addressing a webinar titled ‘Recalibrating Sri Lanka’s National 
Ratings’, yesterday.

Chandra added that Fitch Ratings is expecting a coherent policy framework from Sri Lanka that would improve over a period of time and an improvement in the country’s external liability profile.

This April, Fitch Ratings downgraded Sri Lanka’s sovereign rating to ‘B-’, from ‘B’, with a Negative outlook. The downgrade was attributed to the country’s external financing challenges. 
Sri Lanka’s external assets, as a percentage of liquid external liabilities, stood at about 60 percent in 2019, which is the lowest in its rating category. 

For the current year, Chandra noted that Sri Lanka would be able to roll over most of its debt, except the international sovereign bond.  

However, with reserves expected to contract further and having a debt servicing obligation amounting to an average of US $ 4.3 billion per year up to 2025, market access would be another determinant, she said. 

Chandra reiterated that Sri Lanka’s external financing challenges have increased in the current environment of global risk aversion and finance market volatility.
The Central Bank expects to tap international capital markets next year to raise funds.