Fitch Ratings has affirmed Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CCC’.
KEY RATING DRIVERS
Sri Lanka’s ‘CCC’ rating reflects a challenging foreign-currency sovereign external debt repayment burden over the medium term, low foreign-exchange reserves and high and rising government debt that gives rise to sustainability risks.
External liquidity pressures have eased somewhat in recent months following bilateral loan disbursements, and our expectation of a forthcoming IMF special drawing rights (SDR) allocation. Nevertheless, Sri Lanka’s medium-term debt service challenges are substantial and pose risks to the sovereign’s debt repayment capacity, in Fitch’s view. A total of about USD29 billion in foreign-currency debt obligations are due between now and 2026, against foreign-exchange reserves of USD4.5 billion as of end-April 2021.
The authorities have recently secured project financing through various multilateral and bilateral channels, including the Asian Development Bank (AAA/Stable), Asian Infrastructure Investment Bank (AAA/Stable), China Development Bank (A+/Stable) and The Export-Import Bank of Korea (AA-/Stable), as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework and the People’s Bank of China, equivalent to USD400 million and USD1.5 billion, respectively. The planned IMF SDR allocation would also add USD780 million to reserves. These resources should enable Sri Lanka to meet its remaining debt maturities through the rest of this year, including a USD1 billion International Sovereign Bond maturing in July. However, the authorities have yet to specify their plans for meeting the country’s foreign-currency debt-servicing needs for 2022 and the medium term. They have consistently indicated that they do not plan to seek program financing from the IMF.
Fitch projects foreign-exchange reserves to remain at about USD 4.5 billion by end-2021 before declining to USD3.9 billion by end-2022. Under our baseline, the current account deficit is likely to widen to 2.8% in 2021 and narrow to 2.1% of GDP in 2022. Our forecasts assume remittances will remain resilient in 2021-2022 and tourism is likely to recover only from 2022.