- Country at risk of further downgrades
- Foreign reserves position not favourable
- High levels of uncertainty add to woes
- Expects funding pressures to heighten
- Sound fiscal and macro policy framework could reverse current rating stance
By Shabiya Ali Ahlam
As Sri Lanka’s debt burden continues to mount alongside the pressures faced in reducing the implications of the COVID-19 crisis on the economy, Fitch Ratings said it expects the island nation’s debt to reach close to 100 percent of its gross domestic product (GDP) in the next two years, under the agency’s baseline, unless some major measures are in place.
Sri Lanka is faced with the daunting task of paying debt amounting to over US $ 4 billion per annum on average, until 2025 and with the reserves position not being at favourable levels, the country is at risk of further downgrade.
On April 24, Fitch downgraded Sri Lanka’s sovereign rating to ‘B-’, from ‘B’, with a ‘Negative’ outlook.
“We don’t know how long the pandemic would last and Sri Lanka’s policy outlook remains uncertain and unclear. Looking at the baseline, it looks like debt will continue to go up, close to 100 percent by 2023, unless there are some major measures in place for growth recovery as the deficits come down,” said Fitch Ratings Sovereign Ratings Associate Director Sagarika Chandra.
The ratings agency representative presented her observations while speaking on the impact of COVID-19 on Sri Lanka’s economy.
Chandra said that it was expected that the debt ratio would stabilise at 84 percent of GDP in the most recent review but the looming uncertainty is likely to make the debt-to-GDP ratio go higher.
Although the government has reached out to meet the funding gaps, its requirement is quite high and with a high degree of uncertainty, it is expected the funding pressures would get heightened.
Chandra said that during the forecast and reviews, the government’s efforts in getting funding from multilateral sources have been factored in but Fitch Ratings is of the view that the risk is high, as it is uncertain if these efforts would even materialise.
“If these loans would materialise, is a big question. The funding agencies look at Sri Lanka’s ability to have a coherent policy framework that is reliable. Since there is political policy uncertainty in the country, there is not much clarity on that as well,” she explained.
Chandra pointed out that looking further at the rating triggers, if any further increase in external funding stress is observed, that would be a negative rating trigger for Sri Lanka.
However, if an improvement is seen in the review metrics and if the government can put together a sound fiscal and macro policy framework, bringing down the debt-to-GDP ratio, the trigger would be positive.
On the foreign exchange reserve front, Chandra said Fitch does not expect a continuous decline but stressed the risk is high for a contraction to take place, if funding pressures increase. “There is a lot of vulnerability of the credit to external shocks. It could also come from the domestic side of things and politics. The risk of the reserves declining faster than expected is high at this point of time,” she said.