Moody’s Investors Service (“Moody’s”) has yesterday placed the Government of Sri Lanka’s long-term foreign currency issuer and senior unsecured B2 ratings under review for downgrade.
The decision to place Sri Lanka’s ratings on review for downgrade is prompted by Moody’s assessment that the acute tightening in global financing conditions, fall in export revenue, and sharp slowdown in GDP growth as a result of the global coronavirus outbreak exacerbate Sri Lanka’s existing government liquidity and external vulnerability risks, raising risks of heightened financing stress and macroeconomic instability.Moreover, the economic and financial shock will further dim medium-term prospects for reforms that would meaningfully strengthen Sri Lanka’s fiscal and external position. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and falling asset prices are creating a severe and extensive credit shock across many sectors, regions and markets.
The combined credit effects of these developments are unprecedented. Moody’s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
For Sri Lanka, the current shock transmits mainly through capital outflows, a marked local currency depreciation, wider risk premia and a sharp drop in GDP growth that raise the sovereign’s debt burden, liquidity pressures and cost of external debt servicing.
This shock occurs at a time when Sri Lanka’s credit profile is highly vulnerable given low reserve coverage of large forthcoming external debt payments and very weak debt affordability.
At the same time, Sri Lanka’s relatively robust institutions and governance strength compared to similarly rated peers and a sizeable banking sector may support the government’s access to funding at manageable costs.
The review period, which may extend beyond the usual three-month horizon, will allow Moody’s to assess the capacity of the government to secure financing at manageable costs and in a way that does not further weaken the country’s external position and threaten macroeconomic stability.
The review will also assess the likelihood of the government being able to stabilize its debt burden and restore better debt affordability once the most acute phase of the shock has passed. Concurrently, Sri Lanka’s local currency bond and deposit ceilings remain unchanged at Ba2.
The Ba3 country ceiling for foreign currency bond and B3 ceiling for foreign currency bank deposits also remain unchanged.
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