The New York-based rating agency said it would be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.
Fitch downgraded Sri Lanka’s sovereign rating from ‘CCC’ to ‘CC’, saying the fall in foreign exchange reserves raised the possibility of default in the coming months in view of the country’s deteriorating external liquidity position.
The New York-based rating agency said it would be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources.
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“Obligations include two International Sovereign Bonds of $500 million in January 2022 and $1 billion due in July 2022,” it said.
“The downgrade reflects our view of the increased likelihood of a default event in the coming months in light of Sri Lanka’s deteriorating external liquidity position, underscored by a decline in foreign exchange reserves set against higher foreign debt payments and limited financing flows. it happens. The severity of the financial stress is evident from the rise in government bond yields and downward pressure on the currency.”
Fitch said Sri Lanka’s foreign exchange reserves have declined sharper than expected, due to a combination of higher import bills and foreign exchange intervention by Sri Lanka’s Central Bank.
“Forex reserves have decreased by nearly $2 billion since August, falling to $1.6 billion at the end of November, the equivalent of less than a month of current external payments (CXP). This represents a decline in foreign exchange reserves of approximately $4 billion since the end of 2020,” it said.
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“The government also faces foreign currency debt service payments, including principal and interest, of $6.9 billion in 2022, which is equivalent to about 430% of the official gross international reserves as of November 2021. The cumulative foreign currency debt service, including interest and principal, amounted to approximately $26 billion from 2022 to 2026,” it said.
Fitch’s latest statement comes after Finance Minister Basil Rajapaksa assured parliament last week that the government is confident of meeting external debt payments when they become due.
Fitch says a currency swap facility with the People’s Bank of China (PBOC) could boost reserves by up to CNY 10 billion (equivalent to $1.5 billion).
In addition, further funding sources are expected to come from India’s economic aid package, including a swap facility under the $400 million South Asian Association for Regional Cooperation currency framework, a swap facility with the Qatar Central Bank, remittance securitization and a revolving Is. Credit facilities with Bank of China Limited, foreign exchange reserves are likely to remain under pressure.
All-round plan on Sri Lanka crisis
It said the Sri Lankan rupee/US dollar spot exchange rate has declined 7-8% since the end of 2020, but the central bank intervention to support the currency has led to a fall in reserves.
To deal with the stockpile crisis, the island nation has reduced imports leading to a shortage of essential commodities.
The island’s only refinery was ordered to close in mid-November due to a lack of foreign exchange to import crude.
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