Fitch downgraded Sri Lanka’s rating to ‘CCC’ from ‘B-’ in November 2020, reflecting the sovereign’s increasingly challenging public and external debt position.
Fitch Ratings: How Are Sri Lanka’s Fragile External Finances Likely to Hold Up in 2021?
The coronavirus shock has exacerbated an already high public debt-to-GDP ratio, and financing options for the sovereign have narrowed. Financing and debt service challenges are also underscored by an extraordinarily high ratio of general government interest to revenue of more than 80%.
Government external debt obligations amount to USD23.2 billion between 2021 and 2025 or about USD4 billion annually, against official FX reserves of just USD5.6 billion as of end-November 2020. For 2021, the authorities plan to meet their financing needs through a combination of bilateral, multilateral and commercial sources. In Fitch’s view, accessing this financing will be challenging in the absence of an IMF program, which appears unlikely, and given investor concerns about Sri Lanka’s high government debt ratio, which we forecast to continue rising from around 100% of GDP in 2020 to 116% in 2024. Under our baseline forecasts, we expect Sri Lanka’s FX reserves to decline over the forecast period to around USD4.2 billion in 2021 and USD3.4 billion 2022.
Remittances have performed unexpectedly well during the pandemic, growing by about 4% yoy between January and November, and have helped to support Sri Lanka’s external position. Sri Lanka is one of the region’s most dependent economies on remittances, accounting in recent years for about 8% of GDP. However, the better-than-expected performance may prove temporary, owing to factors such as workers repatriating their savings before returning home, and a shift towards more formal (i.e. recorded) remittance channels.
Travel and tourism, an important driver of the economy and external finances, has been hit hard by the pandemic and the outlook for its recovery remains uncertain at best. Imports have declined following the imposition of various controls, keeping Sri Lanka’s current account from deteriorating significantly in 2020. We expect the current account deficit to remain manageable at about 2% -3% of GDP in 2021 and 2022.