Sri Lanka rejects Moody’s plans of a possible rating downgrade
View(s):The Sri Lankan Government has rejected plans by rating agency Moody’s to place ‘under review for a downgrade’ the Government of Sri Lanka’s Caa1 foreign currency long-term issuer and senior unsecured debt ratings.
The Caa1 rating is judged to be of poor standing and is subject to very high credit risk.
Expressing surprise at the announcement by Moody’s, the Ministry of Finance said in a statement that the unwarranted announcement by Moody’s “reemphasises the need for the government to revisit its relationship with rating agencies”. “Unwarranted announcements of this nature are also not in the interest of investors,” it said.
It said the Moody’s announcement would create uncertainty among investors who have faith in Sri Lankan International Sovereign Bonds and other investments.
The ministry said that while the economy is expected to improve from last year, sufficient funds have been allocated to repay foreign debt due at end July 2021.
Moody’s on Monday placed the Government of Sri Lanka’s Caa1 foreign currency long-term issuer and senior unsecured debt ratings under review for a downgrade.
The decision to place the ratings under review for downgrade is driven by Moody’s assessment that Sri Lanka’s increasingly fragile external liquidity position raises the risk of default. This assessment reflects governance weaknesses in the ability of the country’s institutions to take measures that decisively mitigate significant and urgent risks to the balance of payments, the rating agency said in a media release.
Although the government has secured some financing, mainly from bilateral sources, its financing options remain narrow with borrowing costs in international markets still prohibitive, it said.
Moody’s said it expects Sri Lanka’s foreign exchange reserves to continue declining from already low levels, further eroding its ability to meet sizeable and recurring external debt servicing needs, and increasing balance of payment risks.
Extremely weak debt affordability — with interest payments absorbing a very large share of the government’s very narrow revenue base — compounds the debt repayment challenge.
The rating review will focus on assessing whether the sovereign is able to use a period of time provided by its current foreign exchange reserves and bilateral arrangements to implement measures that widen and increase its financing sources for the medium term, and thereby avoid default for the foreseeable future.
Sri Lanka’s foreign currency country ceiling has been lowered to Caa1 from B3, while the local currency country ceiling remains unchanged at B1.
The three-notch gap between the local currency ceiling and the sovereign rating balances relatively predictable institutions and government actions against the low and declining foreign exchange reserves adequacy that raises macroeconomic risks as well as the challenging domestic political environment that weighs on policymaking.
The three-notch gap between the foreign currency ceiling and local currency ceiling takes into consideration the high level of external indebtedness and the risk of transfer and convertibility restrictions being imposed given low foreign exchange reserves adequacy, with some capital flow management measures already imposed.
These ceilings typically act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.
Sri Lanka’s low and declining foreign exchange reserves adequacy, limited and narrowing set of external financing options for the government, and the extremely large share of government revenue taken up by interest payments raises the risk of debt default.
The increasing fragility of the situation and continued worsening of credit metrics without decisive actions are indications that institutional credibility and effectiveness have weakened compared with Moody’s prior assessment, the Moody’s statement said.
As of the end of June, Sri Lanka’s foreign exchange reserves (which in Moody’s definition exclude gold and Special Drawing Rights) amounted to just around $3.6 billion, down 30% since the start of the year and insufficient to cover the government’s annual external debt repayments alone of around $4-5 billion over the next 4-5 years.