Fri, 29 Mar 2024 Today's Paper

Fitch downgrades Sri Lanka to ‘CCC’

By

28 November 2020 02:10 am - 0     - {{hitsCtrl.values.hits}}

A A A

 

  • Cites challenging external-debt repayment position over the medium term as key reason
  • Says external financing options for SL will become more challenging
  • Fitch believes financing conditions for potential market issuance have tightened materially
  • Fitch estimates SL’s debt to GDP ratio to increase to about 100% in 2020 from 86.8% in 2019
  • Says budget 2021 lacks credible fiscal consolidation strategy
  • Believes official revenue projection of nominal revenue growth of about 28% in 2021 is highly ambitious
  • Projects budget deficit to widen to about 11.5% of GDP in 2021 and 2022
  • Expect GDP to contract by 6.7% in 2020
  • Views increase in workers’ remittance flows as temporary

Fitch Ratings yesterday downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’ from ‘B-‘ with ‘Negative’ outlook.  


The rating agency said it does not assign outlooks or apply modifiers to sovereigns with a rating.


Other countries alongside Sri Lanka in the same ‘CCC’ rating class are Angola, Gabon, Laos, Republic of Congo and Mozambique.


Fitch said the downgrade reflects Sri Lanka’s increasingly challenging external-debt repayment position over the medium term. In particular, a sharp rise in the sovereign debt to GDP ratio associated with the coronavirus shock and narrowing financing options have heightened debt sustainability risks.


“Sri Lanka’s external funding needs are substantial over the medium term, and in our view, risks to the sovereign’s ability to meet its external-debt service obligations have increased,” the rating agency said.


The government’s external-debt obligations amount to US$ 23.2 billion between 2021 and 2025 or about US$ 4 billion annually, against FX reserves at end-October of just US$ 5.9 billion. 


Fitch also said Sri Lanka’s financing and debt service challenges are exacerbated by its existing financing model, which has resulted in very high general government interest to revenues ratios.

 The average interest to revenue ratio from 2016 to 2020 is about 50 percent, substantially above the ‘CCC’ peer median of about 11 percent.


The government has announced plans to meet the country’s external-debt obligations in 2021-2025 through a combination of sources, including bilateral, multilateral and commercial financing.


But in Fitch’s view, access to such external financing options will become more challenging against the backdrop of already high debt levels and an expected further weakening of government debt dynamics. 


Meanwhile, Fitch believes that financing conditions for potential market issuance have tightened materially, notwithstanding the reduction in political and policy uncertainty following the completion of parliamentary elections in August 2020 and submission of the draft 2021 budget in November.


“We think there are now increasing risks to Sri Lanka’s ability to meet its external-debt repayments as reflected in our forecast of a steady decline in FX reserves in 2021 and 2022. We expect Sri Lanka’s external liquidity ratio, defined as liquid external assets/external liabilities, will remain low at about 63 percent, against a ‘CCC’ median of about 68 percent in 2021.”


In the 2021 budget, the government revealed plans for external borrowings of project and programme loans mostly through bilateral and multilateral sources (about US$ 1.8 billion), as well as foreign commercial loans (about US$ 1.4 billion) for budget support. 


Sri Lanka does not currently anticipate a financing arrangement with the IMF.


Fitch estimates Sri Lanka’s government debt to GDP ratio to increase to about 100 percent in 2020 from 86.8 percent in 2019, and to rise further under its baseline scenario to around 116 percent in 2024. 


This trajectory is in sharp contrast to the government’s medium-term fiscal strategy, which envisages a reduction in the debt to GDP ratio to 75.5 percent in 2025 from its estimate of 95.1 percent in 2020. 


The government is forecasting a pick-up in revenues to 14.2 percent of GDP by 2025, from their estimate of 9.5 percent in 2020, with GDP growth picking up to 6 percent or higher over the medium term. It also projects a primary surplus by 2025.


“Our baseline projections are based on more conservative approaches, and we believe, realistic, assumptions for economic growth, revenue and interest payments. 


“Sri Lanka lacks a track record of sustained primary surpluses, its revenue-to-GDP ratio has stayed low and GDP growth has been weak (growth averaged 3.7 percent in 2015-2019). 


Accordingly, our baseline assumptions for 2021-2024 incorporate average annual growth of about 4 percent, a primary deficit of about 2 percent of GDP, and revenue-to-GDP of about 11 percent,” Fitch said. Sri Lanka’s 2021 budget targets a widening deficit of 8.9 percent of GDP, from 7.9 percent of GDP for 2020. The budget contains numerous tax incentives for the agricultural sector, and policies to facilitate private investment. It also includes reforms to improve tax collection and administration, and the introduction of a special goods and services tax for alcohol, betting and gaming, telecommunication and vehicles. 


“In our view, the official revenue projection of nominal revenue growth of about 28 percent in 2021 is highly ambitious given the lack of major revenue-raising measures and the numerous tax incentives, coupled with the tax cuts announced towards end-2019. The budget also targets a large increase in spending, particularly public investment, raising it from an estimated 2.6 percent of GDP in 2020 to 6.1 percent of GDP in 2021,” the rating agency noted.


“In our view, the budget lacks a credible fiscal consolidation strategy and provides only limited details on the potential revenue impact of some of the measures announced, raising uncertainty about the government’s planned reduction in government debt and budget deficit. 


“As such, we project the budget deficit to widen to about 11.5 percent of GDP in 2021 and 2022. This forecast is based on our GDP growth assumption of 4.9 percent in 2021 compared to the authorities’ 5.5 percent. Sri Lanka’s low revenue-to-GDP ratio has remained a key weakness in the fiscal profile and we expect it to remain below the ‘CCC’ median of 23 percent in 2021,” it added.


Sri Lanka’s economic performance has been affected by the COVID-19 pandemic through multiple channels, even though the virus has been relatively well contained domestically. Travel and tourism, which is an important driver of the economy has been hard hit and the outlook for its recovery remains uncertain and dependent on the evolution of the pandemic. The direct contribution of tourism to GDP is about 4 percent, but the indirect spill-over effect is much higher. Private consumption, which accounts for about 70 percent of GDP, was weakened by the domestic lockdown in place between March and May 2020. GDP contracted by 1.6 percent in 1Q20, and Fitch expects an even sharper contraction in 2Q.


“Overall, we expect GDP to contract by 6.7 percent in 2020 and to begin recovering in 2021 by 4.9 percent, partly driven by the low-base effect. Our forecasts are subject to a high degree of uncertainty related to the path of the pandemic globally and in Sri Lanka. 


“However, recent positive news on vaccine development initiatives has highlighted the potential for the gradual roll-out of a medical solution to the pandemic from early 2021, which could facilitate a return to economic normalisation and mitigate the downside risks to macro forecasts,” the rating agency said. Remittance inflows to Sri Lanka have performed unexpectedly well during the pandemic, growing by about 2.7 percent YoY between January-October, and have helped support the external position. 


However, Fitch views this increase as temporary, due to factors such as workers repatriating their savings before returning home, and a shift towards more formal remittance channels. 


“The stronger remittance inflows alongside a decline in imports due to various import controls, has kept Sri Lanka’s current account from deteriorating significantly in 2020. We expect the current account deficit to remain manageable at 2-3 percent of GDP in 2021 and 2022 as some of those import controls are likely to remain in place,” Fitch said.


However, the rating agency noted that Sri Lanka’s basic human development indicators, including education standards, are high compared with the ‘CCC’ median, based on the UN Human Development Index Score, which positions Sri Lanka in the 63rd percentile, well above the 27th percentile for the ‘CCC’ median. 


The country’s per capita income of US$ 3,775 estimated by Fitch at end-2020 is above the ‘CCC’ median of US$ 2,661. According to Fitch, the main factors that could individually or collectively lead to positive rating action would be improvement in external finances supported by higher non debt inflows or a reduction in external sovereign refinancing risks from an improved liability profile; stronger public finances, accompanied by a sustained decline in the general government debt to GDP ratio, closer to the ‘B’ median, underpinned by a credible medium-term fiscal consolidation strategy and improved policy coherence and credibility, leading to more sustainable public and external finances and a reduction in the risk of debt distress.


Moody’s Investors Service downgraded Sri Lanka by two notches to Caa1 from B2 in September. Standard & Poor’s maintains a ‘B-‘rating on Sri Lankan sovereign after downgrading from ‘B’ in May.

 

 


Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

  Comments - 0

Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

Add comment

Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.

Reply To:

Name - Reply Comment





Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

VAT increase: SOUNDs death knell for publishers, readers

Though the Government imposed VAT (Value Added Tax) on vegetables and other e

How female change-makers are driving Sri Lanka’s energy saving platform

Saving energy has become more of a responsibility than a habit in today’s c

A dull Ramadan awaits Muslims amidst the Soaring Cost of Living

In the coming days, Muslims across the world will welcome the Holy Month of R

New wildlife underpass to curtail HEC

As of February 2024, Sri Lanka lost another 38 elephants as a result of the H