Fitch Ratings: Is Sri Lanka Headed for Default?

Sri Lanka’s external liquidity position remains stressed, with USD26 billion in sovereign foreign-currency obligations coming due between now and 2026, against foreign-exchange reserves of only USD3.5 billion as of end-August (up from USD2.8 billion in July reflecting the receipt of USD780 million from the IMF Special Drawing Rights (SDR) allocation).

“Sri Lanka’s public and external finances remain fragile, as reflected in our ‘CCC’ rating in place since November 2020 and affirmed in June 2021. A rating at this level indicates substantial credit risk, with default “a real possibility,” Director, Sovereigns of Fitch Ratings, Sagarika Chandra said.

“On our baseline, we believe the authorities can remain current on their obligations through at least mid-2022, with resources from project financing and bilateral and multilateral inflows, and likely rollover of Sri Lanka Development Bonds.”

Through the rest of 2021, the majority of foreign-currency debt repayments consist of project and syndicated loans. Sovereign bond repayments of USD500 million and USD1 billion come due in January and July 2022, respectively. The authorities continue to rule out financing from the IMF.

“We project foreign-exchange reserves to decline to USD2.5 billion by 2023. In a six-monthly roadmap published in October by the Central Bank of Sri Lanka, the authorities have outlined plans to secure funds through bilateral, multilateral and other syndicated loans for 1Q22,” she said.

“However, the financing plans contain limited details, including the sources and timelines of financing arrangements. As positive rating sensitivities we have flagged the need for more enduring improvements in the external and public finances,”

Sri Lanka’s economic prospects remain subdued under the weight of the pandemic.

“We have revised down our growth forecast for 2021 to 3.3% from 3.8%, following a surge in coronavirus cases in July-August, which has now subsided.”

Public finances for Sri Lanka also remain a key credit weakness. The gross general government debt-to-GDP ratio is forecast to keep increasing under our baseline, reaching 113% by 2023 from about 101% at end-2020. The fiscal deficit is also forecast to widen to 12.1% of GDP by 2023 from 11.1% of GDP in 2020.