Fitch-rated frontier markets saw more positive than negative sovereign rating actions in 2018, partly due to higher commodity prices, although the rating agency cut Sri Lanka’s sovereign rating over political uncertainty in December.
Fitch Ratings on December 5 downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating to ‘B’ from ‘B+’, with a Stable outlook.
Fitch Ratings said the downgrade reflects heightened external refinancing risks, an uncertain policy outlook and the risk of a slowdown in fiscal consolidation as a result of the political crisis that was triggered on October 26 with the sacking of the then Prime Minister Ranil Wickremesinghe.
Following a court decision in late December, Wickremesinghe and his government were reinstated. But the crisis delivered a lasting impact on the country’s fragile economy.
Other two international rating agencies, S&P and Moody’s, also downgraded Sri Lanka owing to the political crisis, narrowing Sri Lanka’s scope to raise funds from international financial markets at relatively lower rates to settle its debt obligations.
Sri Lanka this year has to settle debt obligations to the tune of US $ 5.9 billion and has to settle US $ 4 billion on average for the next four years.
Meanwhile Fitch said some frontier markets still face challenges in the coming year the nature of these challenges and relative vulnerabilities vary from region to region and sovereign to sovereign.
Of the 30 Fitch-rated frontier markets, 13 saw positive rating actions last year, compared with six negative actions and the majority were Outlook changes, Fitch said.
Rating actions were balanced in Asia in 2018. We downgraded Pakistan and Sri Lanka in December. Both countries face external pressures and refinancing risks and these were exacerbated in Sri Lanka by October’s political crisis.
The IMF assistance may eventually be forthcoming in Pakistan, which has engaged in programme discussions, and Sri Lanka appears keen to resume its programme,” Fitch noted.