May 21, 2020 (LBO) - Rating agency S&P has lowered Sri Lanka’s long-term sovereign credit rating to B- from B, with a stable outlook, citing the government’s worsening fiscal position.
S&P expects the COVID-19 outbreak to push Sri Lanka’s economy into a recession in 2020, against earlier expectations of a rebound. This would weaken Sri Lanka’s already-fragile fiscal position.
S&P said the uncertainty over the pandemic and the associated economic fallout have increased Sri Lanka’s external financing risks.
“We lowered our ratings on Sri Lanka based on our assessment that the country’s fiscal position has weakened substantially amid a COVID-19-induced recession. With fiscal space already limited by the wide-ranging tax cuts announced at the end of last year, this deterioration will worsen the risks associated with Sri Lanka’s government debt burden, in our view.”
“Our ratings on Sri Lanka reflect the country’s relatively modest income levels, weak external profile, sizable fiscal deficits, extremely high government indebtedness, and extremely large interest payment burdens,” S&P further explained.
The rating agency noted that the economy pushed into recession by COVID-19 while delayed elections increase political uncertainty
“Economy likely to be heavily impacted as tourism and some export sectors temporarily grind to a halt amid COVID-19 outbreak, while curfews and containment measures weigh on domestic activity. Barring further unforeseen shocks, we expect the economy to recover from 2021 onwards. Delays in parliamentary elections likely to prolong political uncertainty, in our view.”
S&P said the stable outlook reflects their expectation that the government still has access to various multilateral and bilateral resources that could augment their foreign exchange reserves to meet immediate debt obligations.
“The stable outlook reflects our view that Sri Lanka still has access to sufficient resources, including from multilateral and bilateral partners, to meet its debt obligations over the next 12 months.”
S&P affirmed the short-term foreign and local currency credit ratings at ‘B’. The transfer and convertibility assessment is revised to ‘B-’ from ‘B’.
The rating agency said it would consider raising the rating if credible improvements in the fiscal and debt metrics on a sustained basis are seen.