The Long-Term Local-Currency IDR would be further downgraded if the government announces plans to restructure or defaults on its local-currency debt, says Fitch Ratings.
Releasing a statement, the agency pointed out that the issue of whether to include local-currency debt in any restructuring will be one of the factors complicating debt negotiations.
Fitch downgraded Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’, in December 2022, reflecting their view that a local-currency debt default is probable in light of an untenably high domestic interest payment/revenue ratio, high interest costs, tight domestic financing conditions and rising local-currency debt/GDP in the context of high domestic fiscal financing requirements, which authorities forecast at about 8% of GDP in 2022.
“The Long-Term Local-Currency IDR would be further downgraded if the government announces plans to restructure or defaults on its local-currency debt," the agency warned.
Fitch, however, rates Sri Lanka’s Long-Term Foreign-Currency IDR at ‘RD’.
“We may move the IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community."
If the key parameters for returning to debt sustainability under the IMF programme allow for a moderate and extended debt reduction process, this could facilitate debt restructuring talks, but may weigh on the sovereign’s post-default credit ratings, the rating agency further said.