Fitch downgrades Sri Lanka due to declining foreign reserves, low revenue

Fitch Ratings on Monday downgraded Sri Lanka's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-' owing to decline in foreign reserves, increasing re-finance risks and low government revenue, in a blow to the country's ratings.. 
“A Negative Outlook has been assigned to the IDRs. The issue ratings on Sri Lanka's senior unsecured foreign- and local-currency bonds are also downgraded to 'B+' from 'BB-'. The Country Ceiling is downgraded to 'B+' from 'BB-' and the Short-Term Foreign-Currency IDR is affirmed at 'B',” the rating agency said in a media announcement.
On Friday, one of the opposition parliamentarians said in Parliament that Fitch had downgraded Sri Lanka. There was no response however from government benches to this claim. 
The following reasons were given by Fitch for the downward rating:
- Increasing refinancing risks. The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. Further, the sovereign's external liquidity position remains strained, reflecting pressure on foreign exchange reserves. In Fitch's view, this partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral institutions. Sri Lanka's external liquidity ratio, as measured by Fitch at the end of 2015, was 70.9 per cent, which is far below the median of 'B'-rated peers' of 171.9 per cent and the 'BB' median of 152.4 per cent. 
- Significant debt maturities. Sri Lanka faces significant debt maturities in 2016 amid the country's vulnerability to a shift in investor sentiment. Fitch estimates the sovereign's external debt service to be close to US$4 billion for the rest of 2016, compared with forex reserves of $6.3 billion (end-January 2016). Sri Lanka's vulnerability to a shift in investor sentiment was evident when investors sold-off the equivalent of nearly $2 billion in local-currency government securities in 2015. A further outflow from treasury bills and treasury bonds, which account for about 31 per cent of the country's foreign reserves, could put more pressure on reserves. However, prevailing low oil prices will continue to support Sri Lanka's current-account deficit in the near term. Fitch expects the current-account deficit to remain manageable at about 3 per cent of GDP over 2016-17. 
- Weaker public finances. The deterioration in Sri Lanka's fiscal finances is driven partly by consistently low general government revenues. At an estimated 13 per cent of GDP, Sri Lanka's gross general government revenues remain far below the 'B' median of 25.4 per cent and the 'BB' median of 26 per cent. The 2016 budget did little to address this issue directly and absent any significant fiscal consolidation, Fitch expects continued fiscal slippage over 2016-17. Sri Lanka's gross general government debt (GGGD) burden is estimated to have increased to more than 75 per cent of GDP by the end of 2015, up from 71 per cent at the end of 2014 and much higher than the 'B' median of 52 per cent of GDP and 'BB' median of 43.6 per cent.
- Decline in foreign-exchange reserves. Fitch has revised downwards its forecast for foreign-exchange reserves, with reserve coverage of current external payments now forecast to decline to 2.9 months in 2016 from an estimated 3.4 months in 2015. This forecast compares unfavourably with Fitch's earlier forecast of 3.9 months for 2016 and is well below the 'BB' median of 4.2 months. While the authorities have undertaken certain measures to support external finances, including entering into bilateral swaps with other central banks, Fitch does not view this to be a sustainable way to improve the stability of the external finances. 
- Foreign-currency debt portion remains high. Sri Lanka has also increased its issuance of foreign-currency debt, which Fitch estimates now makes up close to 46 per cent of total public debt, up from nearly 42 per cent at the end of 2014. This has increased vulnerability of Sri Lanka's public debt to a significant depreciation of the exchange rate, which would increase the debt burden in local currency terms. -ENDS -