Moody’s downgrades Sri Lanka to Ca

Moody’s on Monday downgraded Sri Lanka to Ca from Caa2 following the government’s suspension of principal and coupon payments on offshore public debt.

The rating agency said the suspension of debt servicing will result in a series of defaults starting with the first coupons due on April 18, which are unlikely to be cured during the grace period.

It expects material private sector creditor losses from an eventual debt restructuring which will exceed the levels of loss consistent with a Caa2 rating.

“This assessment further reflects governance weaknesses in the ability of the country’s institutions to take measures that decisively address the very low adequacy of foreign exchange reserves and very weak debt affordability, thereby contributing to loss given default, at least in line with precedents by other defaulting sovereigns,” said Moody’s.

Foreign exchange reserves, excluding gold and special drawing rights, were at US$1.7bn at end-March, said Moody’s, equal to only one month of imports. The Central Bank of Sri Lanka has fully drawn down a US$1.5bn swap with China.

Moody’s downgrade followed last week’s downgrades of Sri Lanka from S&P and Fitch to CC and C, respectively. Fitch also demoted a US$175m government-guaranteed 7% unsecured bond due 2024 issued by SriLankan Airlines to C from CC to reflect the guarantor’s downgrade.