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Govt. slams Fitch for downgrading Lanka
View(s):The Government yesterday hit back at a Fitch Ratings downgrade of the country’s Long-term Foreign-Currency Issuer Default Rating (IDR) which had put it in the company of Angola, Argentina, Republic of Congo, Gabon, Laos, the Maldives and Mozambique.
Fitch is a leading provider of credit ratings, research and analysis for global financial markets. The downgrade reflects Sri Lanka’s “increasingly challenging external-debt repayment position”–settlement of foreign loans–over the medium term, it said.
The Finance Ministry, which is helmed by Prime Minister Mahinda Rajapaksa, expressed disappointment at the rating action when the new Government had just announced its medium-term policy framework in the recent budget.
“We do not accept this downgrade as it fails to recognise the robust policy framework of the new Government for addressing the legacy issues, including the concerns raised by Fitch Ratings, and ensuring ongoing economic recovery and macroeconomic stability of the country,” it said.
But Fitch warned that the Government would have to pay US$ 23.2 billion between 2021 and 2025 (about US$ 4bn annually) against foreign exchange reserves at the end of October of just US$ 5.9bn. Financing and debt repayment challenges are “exacerbated by its existing financing model…”
The authorities plan to meet these external debt obligations 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,” the rating agency said.
Fitch had earlier forecast a “steady decline” of foreign exchange reserves in 2021 and 2022. It now estimates the Government debt to GDP ratio to increase to about 100 percent in 2020 from 86.8% in 2019, and further to around 116% in 2024.
The Finance Ministry said Fitch had ignored several key proposals in the budget. The Government has adopted a novel approach in relation to foreign financing while enhancing the effectiveness of already secured financing channels, aimed at reducing the share of foreign financing of the budget deficit over the medium term, it said.
Yet, Fitch Ratings builds up its argument based on the ‘existing financing model’, thus adopting a backward looking approach.
“As the relative share of outstanding foreign debt has already fallen to 44 percent as per the latest available data, projecting a rise in foreign debt servicing obligations in the period ahead cannot be corroborated with facts,” the Ministry maintained.
“Based on such unfounded assumptions, Fitch Ratings project a government debt to GDP ratio of 100 percent at end 2020 and 116 percent at end 2024, while grossly overestimating the budget deficit at around 11.5 per cent of GDP in 2021 and 2022,” it continued.
The Ministry said the rating action was based on “these ill-informed model projections, without any evidence-based and objective analysis”.