Govt. slams Fitch rating downgrade

• Says it was “illogical and ill timed” without considering Govt. measurers
• Claims COVID-19 outbreak contained to “great extent” 
• Confident easing of curfew will see demand pick up in 2H
• Disagrees with Fitch estimate of 9.3% deficit, insists expenditure curtailed 
• Insists debt financing costs will not accelerate as Govt. focus on bilateral and multilateral options of swaps and credit lines 
• Confident of withstanding any near-term shocks caused by COVID-19 
• Govt. committed to practice measures to protect economy

The Government yesterday criticised international rating agency Fitch’s downgrade of Sri Lanka’s sovereign rating as “illogical and ill timed” and said it was committed to proactive measures to meet all debt obligations and protect the economy. 

In a statement issued by the Finance Ministry in response to the Fitch ratings decision to downgrade Sri Lanka from ‘B’ to ‘B-’ with Outlook Negative, the Government emphasised that is vehemently disagrees with the agency’s evaluation. It also referred to an earlier downgrade by Fitch ratings during the 2018 constitutional crisis.  

“The Government of Sri Lanka finds the decision of Fitch Ratings to revise the country ratings to ‘B’ from ‘B’, illogical and ill-timed and wishes to categorically disagree with the assessment of risks for Sri Lanka. 

“Their assessment shows rush to judgment and exposes prejudicial nature, at a time when the whole world is grappling with a global health crisis. It is noteworthy that Fitch Ratings acted in a similar fashion towards the latter part of 2018, despite authorities’ insistence that the strength of institutions in Sri Lanka warrants holistic assessment before rushing to initiate a rating action.” 

The Government contended that in contrast to the experience of many other countries, Sri Lanka has implemented a number of proactive measures that have already helped contain the spread of the COVID-19 outbreak to a great extent. 

“Government has already initiated measures to bring normalcy across the major parts of the country. This would allow further easing of containment measures by end of the second quarter, enabling domestic economic activity to pick up in the second half of 2020. 

“Accordingly, a more realistic growth projection is positive but low growth in 2020, which would partly benefit from the lower base prevailed in 2019,” the statement argued referring to Fitch ratings predicting that Sri Lanka’s growth would contract by at least 1% in 2020. 

The Government argued that on the fiscal side, Fitch Ratings grossly overstated the fiscal deficit in 2020 and the resultant impact of Government debt by ignoring the prudent measures taken by the Government to curtail expenditure, and the impact of the delayed Government Budget towards the second half of 2020, thereby limiting the fiscal space for additional expenditure for this year. 

Fitch ratings estimated that Sri Lanka’s Budget deficit 9.3% and warned that the country has to repay $ 3.2 billion between May and December including a $ 1 billion sovereign bond payment in October. Currently Sri Lanka’s reserves are estimated to be at about $ 7.2 billion.  

“Further, Fitch Rating’s assessment completely ignores the non- acceleration of financing costs for the Government financing, in fact financing cost from both domestic and external sources have markedly come down so far during 2020. 

“Government has taken proactive measures in mobilising funds from multiple sources of market based and official sources of financing to effectively improve terms and conditions of financing. Given volatile global market conditions and financial market panic, the issuance of an international bond by the Government may not anticipated in the near term.”

The statement went onto say the focus of financing will be to further explore bilateral and multilateral sources strategically to benefit both risk and cost considerations. Fitch estimates that debt as a percentage of GDP will rise to 94% in 2020 and 96% in 2021. 

The rating agency also said that Sri Lanka is unlikely to go to international financial markets to raise money for debt repayment given the volatility of markets but raising funds from alternative sources would also be challenging given policy uncertainty created by the delay in Parliamentary Elections and the non-existence of the Budget for 2020. The current Vote on Account of the Government will lapse on 30 April. 

“Access to international bond markets will be considered not only for financing purposes but also for liability management initiatives. Instead, it could resort to official sources from bilateral and multilateral means of financing which include the IMF rapid financing instrument, swap facilities with friendly central banks, arrangements of syndicate financing and creating spaces within already contracted arrangements at competitive terms and conditions in the form of upsizing the facilities and aligning credit lines,” the Government statement said. 

It went on to say that with the above measures and given the largely muted external pressures as reflected in a relatively strong external buffers, and the robust domestic financial system, which maintains above average capital and liquidity buffers “will help to withstand any near-term shocks that may arise from the ongoing COVID-19 pandemic”. 

“Accordingly, the Government wishes to assure that it would closely monitor the developments in the economy and take necessary measures to bring normalcy to the economy in the backdrop of COVID-19 pandemic as already seen with containment measures and gradually opening up the regions.”

Further, the Government assured it will remain vigilant in assessing the economic impacts of the domestic and external environments, and “introduce timely proactive measures to honour all its obligations while safeguarding interests of all stakeholders, including external investment partners”.