Sri Lanka on Review for Downgrade by Moody’s

Sri Lanka’s Caa1 long-term Issuer Default Rating (IDR) and unsecured debt ratings have been put under review for downgrade by Moody’s on the stressed liquidity position of the sovereign. Sri Lanka’s foreign currency country ceiling has been lowered to Caa1 from B3, while the local currency country ceiling remains unchanged at B1 due to high external debt. The rating agency expects the nation’s forex reserves to continue to decline in the absence of sustained capital inflows even though the government has secured financing through bilateral sources. The nation’s forex reserves stood at a mere ~$3.6bn in June end, down 30% YTD. These reserves are expected to slide over the next few years given that the government has repayments of ~$4-5bn over the next 4-5 years. The current account deficit is expected to be 1-2% of GDP with the slower than expected recovery of the tourism sector due to the ongoing Covid-19 wave. Despite the growth of ~3.5% this year, the fiscal deficit is expected to be ~9.5-10% of GDP this year and could average 8.5% over the next two years. The debt burden is forecasted to rise to ~110% of GDP over 2022-2023 from ~100% in 2020. Interest payments are likely to remain 60-70% of the government’s revenue over the next few years.