S&P lowers Sri Lanka rating to ‘CCC’ citing greater sovereign default risk

Standard & Poor’s (S&P) today lowered long-term sovereign credit rating on Sri Lanka from ‘CCC+’ to ‘CCC’ on increasing external financing risks.

There is a rising probability of sovereign default scenarios playing out over the next 12 months in the absence of an unforeseen positive development, S&P in a statement said the outlook is negative.

At the same time, the rating agency affirmed ‘C’ short-term credit rating.

S&P said the country’s external position continues to weaken owing to elevated external obligations and uneven access to financing.

Foreign exchange resources will be further pressured over the coming quarters by additional external sovereign debt maturities and current account requirements, it added.

Timely debt service will likely become increasingly difficult over the next 12 months, given Sri Lanka’s vulnerable external profile, sizable fiscal deficits, heavy government indebtedness, and hefty interest payments. These factors significantly constrain ratings.

Macroeconomic policies, including the recent introduction of a $1.2 billion relief package, have provided some support to the pandemic-hit economy. But they have also weakened the government’s fiscal position and worsened the risks associated with the government’s already-high debt burden, S&P said.

Island nation’s economic recovery under pressure from pandemic, external stresses. The economic recovery will be challenged by the ongoing pandemic and external financial stresses, hampering consumer sentiment. This could affect access to capital.

The country’s real gross domestic product (GDP) is expected to grow at 2.2 per cent this year, compared with an estimate of three per cent expansion in 2021. The government has maintained a supportive fiscal policy stance despite its weak finances, it added.

(Source: Business Standard)