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Wednesday, 28 October 2020 00:00 - - {{hitsCtrl.values.hits}}
Moody’s on Monday reiterated that the credit profile of Sri Lanka reflected ongoing Government liquidity and external vulnerability risks, which it expects will be exacerbated by the impact of the coronavirus pandemic.
In its latest report dated 26 October, Moody’s said key credit challenges include large borrowing requirements with high reliance on external funding, and low foreign exchange reserve coverage of forthcoming economy-wide external debt maturities, all set against the Government’s very fragile fiscal position.
“A volatile domestic political environment can also heighten refinancing risk. Moderate income levels and stronger institutions compared with many peers mitigate these challenges,” it added.
The latest report ‘Issuer In-depth’ comes after Moody’s downgraded the Government of Sri Lanka’s long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 and changed the outlook to stable in late September. This move drew objections from both the Treasury and the Central Bank of Sri Lanka soon after.
Moody’s said the stable outlook denoted balanced credit risks at the Caa1 rating level.
At approximately $ 84 billion in nominal GDP as of 2019, Sri Lanka is the second-largest Caa1-rated sovereign, behind only Iraq (Caa1 stable).
Moody’s in its 26 October report said on the downside, Sri Lanka’s very large and recurring financing needs over the near to medium term could put more pressure on the sovereign’s external and liquidity position than currently expected.
On the upside, Sri Lanka’s rating is supported by the country’s relatively high per-capita income and modest economic competitiveness, which provide some prospects for growth to recover to more robust rates. Moderate institutions and governance strength also provides some support compared with similarly rated peers.
“We would be likely to upgrade Sri Lanka’s rating if financing risks diminish materially and durably. This could stem from the Government delivering a credible and secure medium-term financing strategy that maintains a manageable cost of debt, and a faster and more sustained build-up in non-debt-creating foreign exchange inflows,” Moody’s said.
Additionally, it said implementation of fiscal consolidation measures, particularly greater revenue mobilisation that pointed to a material narrowing of fiscal deficits in the next few years and contributed to lower annual borrowing needs, would be positive for Sri Lanka’s rating.
“We would be likely to downgrade the rating if external and domestic financing conditions deteriorate to a greater extent than our baseline expectations, contributing to higher repayment stress more consistent with a lower rating,” Moody’s said.
Additionally, should the probability increase that Sri Lanka’s Government debt will continue to rise markedly beyond its baseline expectations, with a related further deterioration in debt affordability, this would also be likely to result in a downgrade of the rating.
“This credit analysis elaborates on Sri Lanka’s credit profile in terms of economic strength, institutions and governance strength, fiscal strength and susceptibility to event risk, which are the four main analytic factors in our Sovereign Ratings Methodology,” Moody’s latest report said.
