On 18 May, Sri Lanka (Ca stable) defaulted on its international bonds for the first time, after failing to make its coupon payments that were due on 18 April within the 30-day grace period.
The government announced that it would suspend external debt-service payments on 12 April and pursue comprehensive external public debt restructuring in coordination with a potential IMF programme.
In an issuer comment, Moody’s Investors Service said that the current Ca rating of the sovereign is typically associated with a recovery rate of 35%-65%.
“For Sri Lanka, our weak recovery assumptions are driven by the sovereign’s very low foreign exchange reserve adequacy and the government’s very weak debt affordability,” Moody’s said.
Sri Lanka’s foreign exchange reserves excluding gold and special drawing rights stood at $1.6 billion at the end of April 2022, sufficient to cover less than a one month of imports and far below the government’s external debt repayments of $4.0-$6.5 billion per year through at least 2025.
Sri Lanka’s debt affordability remains weakest across rated sovereigns by some distance and for some time in the absence of fiscal reforms, even without the repayment of external debt.
“Extensive delays to the implementation of fiscal adjustments and reforms, and the inability to secure a large, credible and secure external financing envelope from multilateral development partners may result in even lower recoveries than implied by the Ca rating.”