Sri Lanka has sovereign rating upside by end of next year despite challenges, says report

Sri Lanka has potential for an upward revision in its sovereign rating by this time next year, as the country is on course for a strong rebound in its economic growth, boosting its reserve buffers, achieving targets set in the budget, which will reinforce its ability to repay foreign liabilities falling due next year, according to a Colombo-based equities brokerage.   

The three big rating agencies, beginning with Moody’s Investors Service, Fitch Ratings and S&P Global Ratings took turns downgrading Sri Lanka’s sovereign rating from September 26 through December 11, citing elevated refinance risks, stretched fiscal position and doubts on growth prospects.

The government and the Central Bank flat-out rubbished the rating cuts, calling the moves flawed and unwarranted.

“Rating downgrade (is) painful, however could be revised-up in 4Q2021e. Given Sri Lanka proves itself with repayment ability, GDP growth, boost in reserves and achieving 2021e budget, which is doable despite challenges”, said the research arm of Nation Lanka Equities. 

“No defaults and no haircuts, Sri Lankan State will honour all foreign debt obligations. The government reiterating their commitment to honour all foreign debt repayments and working on creating a pipeline of foreign fund inflows is encouraging and praiseworthy,” the report added. 

Although rating agencies always tend to highlight a debt crisis in Sri Lanka, the country has US$ 4 billion in foreign debt per annum for the next few years.

The government has said that it would bring down the foreign debt part of the total debt to 30 percent from 46 percent at present, to further minimize the risks stemming from foreign debt. 

“Tourism income, usually is US$ 4.0 billion plus (and growing) which will fully cover the debt repayment obligations. Even if Sri Lanka generates US$ 2.7 billion after opening for tourism in January 2021e and the bilateral plus multilateral credit lines amounting and SWAPS to c. US$ 2.5 billion will cover the repayment commitments in entirety,” said Danushka Samarasinghe and Anjula Nawarathna, the authors of the report. 

The duo expressed confidence that the stable government, which has a proven track record for implementation and the realisation of credit lines along with  port related foreign direct investments would easily support a 5.3 percent growth in the economy in 2021. 

“BOP could be a surplus of US$ 1 billion in 2021e. With a temporary clamp down on vehicle imports, trade deficit could be at US$ 6.5 billion, which would be largely offset by remittances of US $ 5.5 billion (after factoring in a 20 percent plus drop YoY in 2021e).” 

“And on the back of the Colombo Port City project and the Hambantota Harbour annual FDI’s are expected to be north of US$ 1.4 billion (whilst even with half of 2020 being affected by economic closures Sri Lanka has YTD raked in US$ 345 million of FDI’s)”, the report noted.