Sri Lanka’s stressed external liquidity position is set to remain a weakness for the country’s credit profile, says Fitch Ratings, adding that the country’s debt servicing obligations over 2021-2025 are substantial, amounting to an average of US$4.3 billion per year.
“Policymakers may be able to offer more clarity about their economic agenda once elections are held on August 5, but hurdles to accessing additional external financing support will persist,” the rating agency said on Wednesday.
“We highlighted Sri Lanka’s external financing challenges when we downgraded the sovereign’s rating to ‘B-’ from ‘B’, with a Negative Outlook, in April 2020. The country’s external liquidity ratio (defined by Fitch as liquid external assets as a percentage of liquid external liabilities), at around 60 per cent in 2019, is among the lowest in its rating category,” it said in a statement.
International reserves amounted to $6.5 billion at end-May after falling by around $716 million over the month. This level of coverage is low relative to sovereign external debt that is due the rest of this year. External debt service amounts to around $3.8 billion from June to December 2020, including a $1 billion international sovereign bond payment due in October.
Fitch said Sri Lanka’s growth prospects will depend in part on the evolution of the pandemic in Sri Lanka and globally.
“We estimate the government debt-to-GDP ratio will be elevated at around 94 per cent in 2020, above the ‘B’ rating median of 66%, and will rise further in 2021. The ratio of debt to fiscal revenue, at close to 900 per cent, is also far above the ‘B’ median of 350 per cent. We believe the government will be able to finance its maturing external debt in 2020 through loan disbursements from bilateral and multilateral agencies, apart from the sovereign bond obligation that is due, which we assume will be met out of reserves,” it said.
The government remains in negotiations with bilateral and multilateral lenders to secure financing support, Fitch said adding that external funding strains could ease, at least in the near term, if the authorities secure substantial support beyond the rollover of existing debt incorporated in our assumptions.
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