Sri Lanka’s political landscape an area of key focus, says Fitch Ratings

• Says closely watching developments in political sphere
• Identifies politics as an important factor for ratings in case of SL
• Cautions instability observed in political climate could trigger further downgrade

While keeping a closer eye on the developments in Sri Lanka’s economic front, Fitch Ratings said it would keenly observe the developments in the country’s political landscape, where further instabilities could trigger further negative rating action for the island nation.

Fitch last week downgraded Sri Lanka to Restrictive Default (RD), from ‘C’, after the expiry of the 30-day grace period on coupon payments that were due on April 18, 2022, on two international sovereign bonds. 

The rating agency cautioned that a further downgrade could take place, if the government announces plans to restructure or default on its local currency-denominated debt. However, Fitch Ratings shared that it is looking beyond the domestic debt restructuring when rating Sri Lanka’s Long-Term Foreign-Currency (LTFC).

“The politics is also something which is important in you know, the way the situation bands out. We are also going to be looking at how stable the domestic, political, social situation remains in Sri Lanka,” said Fitch Ratings Director Asia Pacific Sovereigns Sagarika Chandra, speaking at the agency’s latest webinar of frontier economies, held virtually last week.

Fitch will be looking at three key factors in rating the island nation in near future. 

In addition to closely monitoring the domestic and social-political climate, it will also watch the progress achieved with the International Monetary Fund (IMF) and proceeding of the debt restructuring.
“So, I guess we are looking at these three things all in tandem,” said Chandra. 

When questioned where Sri Lanka stands with its regional peer Bangladesh, Chandra responded by saying that the latter is a “much more resilient economy”.

“It (Bangladesh) has its buffers. It doesn’t have much commercial debt to pay. It has a much stronger external position, that is supported by a strong ready-bade garments and worker remittances, unlike Sri Lanka,” pointed out Chandra. 

Bangladesh has received a “BB-” rating in an assessment of its creditworthiness by Fitch Ratings, becoming the highest-rated Asia Pacific sovereign.