Fitch downgrades Sri Lanka to ‘CCC’

0

HONG KONG – Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC’.

Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of ‘CCC’ or below.

The downgrade reflects Sri Lanka’s increasingly challenging external-debt repayment position over the medium term. In particular, a sharp rise in the sovereign debt to GDP ratio associated with the coronavirus shock and narrowing financing options have heightened debt sustainability risks.

Sri Lanka’s external funding needs are substantial over the medium term, and in our view, risks to the sovereign’s ability to meet its external-debt service obligations have increased. The government’s external-debt obligations amount to US$ 23.2 billion between 2021 and 2025 or about US$ 4 billion annually, against FX reserves at end-October of just UA$ 5.9 billion. The sovereign’s financing and debt service challenges are exacerbated by its existing financing model, which has resulted in very high general government interest to revenues ratios. The average interest to revenue ratio from 2016 to 2020 is about 50%, substantially above the ‘CCC’ peer median of about 11%.

The authorities plan to meet their external-debt obligations in 2021-2025 through a combination of sources, including bilateral, multilateral and commercial financing, but in Fitch’s view, access to such external financing options will become more challenging against the backdrop of already high debt levels and an expected further weakening of government debt dynamics. Meanwhile, Fitch believes that financing conditions for potential market issuance have tightened materially, notwithstanding the reduction in political and policy uncertainty following the completion of parliamentary elections in August 2020 and submission of the draft 2021 budget in November.

We think there are now increasing risks to Sri Lanka’s ability to meet its external-debt repayments as reflected in our forecast of a steady decline in FX reserves in 2021 and 2022. We expect Sri Lanka’s external liquidity ratio, defined as liquid external assets/external liabilities, will remain low at about 63%, against a ‘CCC’ median of about 68% in 2021.

In the 2021 budget, the authorities have planned external borrowings of project and program loans mostly through bilateral and multilateral sources (about US$ 1.8 billion), as well as foreign commercial loans (about US$ 1.4 billion) for budget support. The authorities do not currently anticipate a financing arrangement with the IMF.

Fitch estimates Sri Lanka’s government debt to GDP ratio to increase to about 100% in 2020 from 86.8% in 2019, and to rise further under our baseline scenario to around 116% in 2024. This trajectory is in sharp contrast to the authorities’ medium-term fiscal strategy, which envisages a reduction in the debt to GDP ratio to 75.5% in 2025 from their estimate of 95.1% in 2020. The authorities are forecasting a pick-up in revenues to 14.2% of GDP by 2025, from their estimate of 9.5% in 2020, with GDP growth picking up to 6% or higher over the medium term. They also project a primary surplus by 2025.

Our baseline projections are based on more conservative, and we believe, realistic, assumptions for economic growth, revenue and interest payments. Sri Lanka lacks a track record of sustained primary surpluses, its revenue-to-GDP ratio has stayed low and GDP growth has been weak (growth averaged 3.7% in 2015-2019). Accordingly, our baseline assumptions for 2021-2024 incorporate average annual growth of about 4%, a primary deficit of about 2% of GDP, and revenue-to-GDP of about 11%.

Sri Lanka’s 2021 budget targets a widening deficit of 8.9% of GDP, from 7.9% of GDP for 2020. The budget contains numerous tax incentives for the agricultural sector, and policies to facilitate private investment. It also includes reforms to improve tax collection and administration, and the introduction of a special goods and services tax for alcohol, betting and gaming, telecommunication and vehicles. In our view, the official revenue projection of nominal revenue growth of about 28% in 2021 is highly ambitious given the lack of major revenue-raising measures and the numerous tax incentives, coupled with the tax cuts announced towards end-2019. The budget also targets a large increase in spending, particularly public investment, raising it from an estimated 2.6% of GDP in 2020 to 6.1% of GDP in 2021.

In our view, the budget lacks a credible fiscal consolidation strategy and provides only limited details on the potential revenue impact of some of the measures announced, raising uncertainty about the government’s planned reduction in government debt and budget deficit. As such, we project the budget deficit to widen to about 11.5% of GDP in 2021 and 2022. This forecast is based on our GDP growth assumption of 4.9% in 2021 compared to the authorities’ 5.5%. Sri Lanka’s low revenue-to-GDP ratio has remained a key weakness in the fiscal profile and we expect it to remain below the ‘CCC’ median of 23% in 2021.

Sri Lanka’s economic performance has been affected by the COVID-19 pandemic through multiple channels, even though the virus has been relatively well contained domestically. Travel and tourism, which is an important driver of the economy has been hard hit and the outlook for its recovery remains uncertain and dependent on the evolution of the pandemic. The direct contribution of tourism to GDP is about 4%, but the indirect spill-over effect is much higher.

Private consumption, which accounts for about 70% of GDP, was weakened by the domestic lockdown in place between March and May 2020. GDP contracted by 1.6% in 1Q20, and we expect an even sharper contraction in 2Q (publication of the 2Q GDP data has been delayed).

Overall, we expect GDP to contract by 6.7% in 2020 and to begin recovering in 2021 by 4.9%, partly driven by the low-base effect. Our forecasts are subject to a high degree of uncertainty related to the path of the pandemic globally and in Sri Lanka. However, recent positive news on vaccine development initiatives has highlighted the potential for the gradual roll-out of a medical solution to the pandemic from early 2021, which could facilitate a return to economic normalisation and mitigate the downside risks to macro forecasts.

Remittances have performed unexpectedly well during the pandemic, growing by about 2.7% yoy between January-October, and have helped support the external position. However, we view this increase as temporary, due to factors such as workers repatriating their savings before returning home, and a shift towards more formal remittance channels. The stronger remittance inflows alongside a decline in imports due to various import controls, has kept Sri Lanka’s current account from deteriorating significantly in 2020. We expect the current account deficit to remain manageable at 2% -3% of GDP in 2021 and 2022 as some of those import controls are likely to remain in place.

Sri Lanka’s basic human development indicators, including education standards, are high compared with the ‘CCC’ median, based on the UN Human Development Index Score, which positions Sri Lanka in the 63rd percentile, well above the 27th percentile for the ‘CCC’ median. The country’s per capita income of US$ 3,775 estimated by Fitch at end-2020 is above the ‘CCC’ median of US$ 2,661.

The operating environment for banks in Sri Lanka remains challenging and we expect banks’ financial profiles to come under stress. The sector regulatory non-performing loan (NPL) ratio rose to 4.7% by end-2019, prior to the economic disruptions from the pandemic, and reached 5.4% by end-1H20. Underlying asset-quality stress could continue to build, despite the regulatory relief in the form of a moratorium for affected customers that has to a large extent halted the recognition of credit impairment. Sri Lankan banks could also face increased challenges in the access to – and pricing of – foreign-currency funding stemming from the deteriorating sovereign credit profile.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model. Sri Lanka has a medium World Bank Governance Indicator ranking in the 46th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

-Fitch Ratings

 

 

Leave A Reply

Your email address will not be published.

otc high blood pressure treatment blood pressure guidelines medications blood pressure pills that is safe for the liver high blood pressure medication levothyroxine blood pressure medication that reduces blood pressure is there any difference in blood pressure pills high blood pressure child medication blood pressure medication recommendation nose blue blood pressure medication blood pressure is 150 68 should i take my medication blood pressure medication while nursing taking a bunch of high blood pressure pills aerobic exercise and blood pressure medication good blood pressure medication acupuncture treatment for low blood pressure best over the counter pills for high blood pressure blood pressure pill amlodipine besylate high blood pressure signs and treatment moderna vaccine blood pressure medication which blood pressure drugs do not cause tinnitus blood pressure medication fights cancer blood pressure medication skin rash side effects of high blood pressure medication impotence medication to avoid on blood pressure medications high blood pressure rx medication peripheral neuropathy caused by blood pressure medication high blood pressure in pregnancy treatment nice runny nose do to blood pressure medication how to get off of blood pressure pills hiv medication and high blood pressure niacin treatment for high blood pressure two drugs for blood pressure that caused cancer high blood pressure causing medications high blood pressure medication names canada blood pressure medication side effects alcohol i take 3 blood pressure medication blood pressure pills that help with anxiety what iv drug raises blood pressure list of doctors who formulated blood pressure medications how to remember blood pressure medications sleeping pills blood pressure how fast does blood pressure medication take effect sweet n low high blood pressure medication home treatment for blood pressure high blood pressure medication matrocet high blood pressure medication doses blood pressure drug bystolic iberstaron blood pressure medication blood pressure medications st alphabetical celexa and high blood pressure medication does blood pressure pills irritation skin can i take combivent with high blood pressure medication blood pressure medications beta blockers list what to do if blood pressure medication does not work drugs to lower your blood pressure red beet pills for blood pressure taurine and blood pressure medications how ling for garlic pills to lower blood pressure blood pressure medication list and side effects can i take aspirin with high blood pressure medication blood pressure medication teaching about hot tubs water pills high blood pressure over counter what is an arb medication for blood pressure resveratrol high blood pressure medication high blood pressure medication and weight loss gum disease and blood pressure medication benzenesulfonic acid in blood pressure medication taking two blood pressure pills by mistake allergy pills for high blood pressure blood pressure prescription drugs safety blood pressure medication in pregnancy trazodone and blood pressure medication which blood pressure medication is linked to skin cancer list of blood pressure medications with the least side effects could blood pressure medication make blood thicker disadvantages of high blood pressure medication blood pressure medications ludipril typical drugs for high blood pressure otc water pills for high blood pressure blood pressure medications that do not doncause bowel blockage high blood pressure after corrosion treatment how soon does high blood pressure medication work blood pressure medication teaching amertyrine high blood pressure medication increased blood pressure and heart rate after drug overdose over the counter drugs high blood pressure blood pressure medication 25 is blood pressure medication a nitrate most effective blood pressure pills blood pressure medical does red yeast rice interfere with high blood pressure medication can apple cider vinegar pills lower blood pressure does blood pressure medication give you headaches high blood pressure medication and driving should you take blood pressure pills with food inn blood pressure drugs can you eat bananas if taking blood pressure medication popular high blood pressure medication blood pressure medication los blood pressure medication second drug low blood pressure and hypertension medication do water pills lower blood pressure high blood pressure pill aqunadine high blood pressure cholesterol medication how does medication lower blood pressure acetaminophen blood pressure medication blood pressure medication 30 mg that works around the heart what does grapefruit do to blood pressure medication can red yeast rice be taken with blood pressure medication pharmaceutical treatment for high blood pressure are blood pressure pills statins blood pressure pills that start with r blood pressure medication and male impotence taking baby aspirin with other high blood pressure medications what is the medical name for a blood pressure cuff leg cramps and blood pressure medication blood pressure pill name starts with p natural high blood pressure treatments blood pressure medication names losartan higher blood pressure with radiation treatment medical marijauna high blood pressure how to avoid medication for high blood pressure what time is best to take blood pressure medication medication for palpitations and high blood pressure latest news on blood pressure treatment what if i take two blood pressure pills does xanax interfere with blood pressure medication amlipan blood pressure medication vitamin e and blood pressure medication tell me the side effects of high blood pressure medication herbs pills to lower blood pressure blood pressure medication urge to urinate what medication will safely replace lisop as blood pressure medicine active ingredient in high blood pressure medication blood pressure medications cause adrenal tumors is biktarvy ok to take with high blood pressure medication alembic blood pressure medication sandoz blood pressure medication exercise high blood pressure medication grapefruit pills blood pressure treatment for high blood pressure at home blood pressure medication for patients with osa cycle on off blood pressure medication blood pressure drugs that do not cause heat sensitivity blood pressure medications that do not cause coughing what blood pressure medications do not cause rosacea pfizer blood pressure medication side effects do garlic pills really help lower blood pressure should i take medication for anxiety induced blood pressure treatment for uncontrolled blood pressure decongestant medication high blood pressure can stiff days be used with high blood pressure medication how long does it take medication to lower blood pressure what if i miss a blood pressure pill tribenzor high blood pressure pills law lawsuit 2023 treatment of sudden drop in blood pressure zoloft and blood pressure medication orange high blood pressure pill cancer blood pressure pill why cant people with high blood pressure take keto pills how long for blood pressure to go down mini pill should i get second opinion before taking blood pressure medication blood pressure erectile dysfunction medication high blood pressure medication m lot ben medical device lowers blood pressure puppy ate blood pressure pill are there medications for low blood pressure dod blood pressure medication is losartan a blood pressure pill combination drugs for blood pressure marijuana and blood pressure medication interaction blood pressure medication interactions with grapefruit can you eat bananas while taking high blood pressure medication steps before going on high blood pressure medication blood pressure medication when to cut down foods to avoid on blood pressure medication blood pressure medications depression blood pressure medication non beta blocker tattoos and high blood pressure medication what is the medications used to lower blood pressure quickly high blood pressure medication leg swelling blood pressure medication men in your 40s blood pressure medication wieight loss blood pressure medication hy can blood pressure medication lower blood sugar does blood pressure medication make you pee natural treatment high blood pressure during pregnancy can you take l arginine with high blood pressure medication what class of blood pressure medication can can blood pressure pills reduce appetite faa approved medication for high blood pressure high blood pressure medication during pregnancy best blood pressure medication for type 2 diabetes blood pressure and pain medication pain medication that does not affect blood pressure best high blood pressure drugs on the market if you take incorrect medications to lower blood pressure low blood pressure treatments does your body have to adjust to blood pressure medication why water pill for high blood pressure drugs for treatment of very high blood pressure during pregnancy can i drink grapefruit juice with high blood pressure medication can blood pressure pills make you feel cold high blood pressure medication that helps with weight loss amlodipine blood pressure drug blood pressure medication for infants varicose veins blood pressure medication life extension high blood pressure medication does tylenol interfere with blood pressure medication can i take diamox with other high blood pressure medications prestige medical blood pressure cuff calibration drugs used for high blood pressure chamomile tea and high blood pressure medication narcotics stored alongside blood pressure medications in does nutrigrove blood pressure pills work extremely low blood pressure treatment blood pressure medication for iga nephropathy blood pressure medication low side effects can i increase my blood pressure medication what is the best blood pressure medication to take drugs that cause increased blood pressure does biotin interfere with high blood pressure medication cani od on high blood pressure pills blood pressure medication that also helps with jerking blood pressure medication categories first line treatment of high blood pressure medication for low blood pressure in usa armour thyroid drug interactions blood pressure meds hepatitis c treatment high blood pressure high blood pressure arb drugs low blood pressure treatment with essential oils high blood pressure medication list for pregnancy blood pressure medication and snake venom blood pressure medication low dose liquid blood pressure medications ivf drugs and high blood pressure left my blood pressure medication does it matter when you take blood pressure medication can you take blood pressure pills twice a day privilin blood pressure medication how big are blood pressure pills once you start blood pressure medication can you stop diuretic in blood pressure medication what medication reduce blood pressure new blood pressure treatment prescribed home medications for high blood pressure blood pressure medication side effects forums taking blood pressure pills dizzy when bend over a lot blood pressure medication and nyquil cinnamon pills and high blood pressure temporary high blood pressure treatment single agent blood pressure medication blood pressure medication made in china fda approved medications to reduce blood pressure immediate treatment for high blood pressure at home best time to take blood pressure pills muscle loss on high blood pressure medication blood pressure medication when needed treat high blood pressure without medication blood pressure medication side effects for men cbd pills for high blood pressure blood pressure regulation without medication blood pressure medication and pre workout high blood pressure alzheimer disease and antihypertensive treatment miss blood pressure medication blood pressure pills suicide peaceful emergency drugs for low blood pressure common blood pressure medications in canada systolic blood pressure define medical viril and high blood pressure pills can statin drugs help lower blood pressure do you have to wean off blood pressure medication new drugs for blood pressure when is high blood pressure medication necessary drugs for hi blood pressure cold medications and blood pressure taking 2 blood pressure pills mistake why doctors stopped prescribing blood pressure medication common high blood pressure medication canada what side effects does blood pressure medication have ulcer medication high blood pressure can high blood pressure medication elevate alkaline phosphatase blood pressure medication warning getting blood pressure medication jamaica alkaline water and blood pressure medication blood pressure going up and down with medication drugs reduce systolic blood pressure treatment for rapid high blood pressure low blood pressure alternative treatment do all high blood pressure medications cause weight gain medication for increasing blood pressure blood pressure medication for african american males vitamins for high blood pressure treatment aleve with blood pressure medication how to lower blood pressure without pills blood pressure triple pill who blood pressure guidelines for hygiene treatment what drug reduces blood pressure blood pressure medications enalapril met blood pressure medication