Sri Lanka rating lowered to 'CCC/C' on increasing external financing risks: Outlook Negative

January 12, 2022

SINGAPORE -- S&P Global Ratings has lowered its long-term sovereign credit rating on Sri Lanka to 'CCC', from 'CCC+' previously, and says the outlook is negative. At the same time, it affirmed its 'C' short-term credit rating.

S&P says: "The negative outlook reflects our expectation that Sri Lanka's external financial position will deteriorate further over the coming quarters. This would affect Sri Lanka's ability to service its debt over the next 12 months.

"We could lower our ratings if Sri Lanka's fundraising activities fall short of Government targets or its foreign exchange reserves erode further beyond our expectations, leading to higher risk on the sovereign's ability to service debt.

"We could also lower the ratings if the Government signals its intention to restructure its outstanding commercial debt, implying that investors would receive less value than that promised on the original securities.

"We may revise the outlook to stable, or raise the rating, if Sri Lanka can significantly boost external buffers or its economic recovery is much stronger than we expect. This could lower the risks associated with the Government's debt-servicing capacity.

S&P says the downgrade reflects continued deterioration in Sri Lanka's ability to maintain sufficient foreign exchange resources to meet elevated external obligations.

"The Sri Lankan Government faces increasingly-likely default scenarios without unforeseen significant positive developments," it says.

"Timely debt service will likely become increasingly difficult over the next 12 months, given Sri Lanka's vulnerable external profile, sizable fiscal deficits, heavy government indebtedness, and hefty interest payments. These factors significantly constrain our ratings.

"Macroeconomic policies, including the recent introduction of a US$1.2 billion relief package, have provided some support to the pandemic-hit economy.

"But they have also weakened the Government's fiscal position and worsened the risks associated with the Government's already-high debt burden." (ATI).