Sri Lanka’s Weakening External Finances to Pressure Corporate Ratings: Fitch Ratings

Sri Lankan corporates could face rating pressure should the government further restrict imports amid weakening external finances, Fitch Ratings says in a new report. Fitch expects corporates that import finished goods in sectors that are considered non-essential to be more affected than those that import raw materials for local value addition.

Consumer durable importers are the most vulnerable to tighter import restrictions among Fitch-rated issuers, owing to the discretionary nature of their products and limited domestic value addition. However, consumer durable retailers have been able to import buffer stock and secure longer credit terms from global suppliers, which we believe mitigates pressure in the next six months. The government removed requirements to import most goods on 180-day credit terms in June 2021, but the central bank said on 28 June 2021 that imports of essential intermediate- and capital -goods will be given priority.

Fitch expects cash flow of corporates that sell domestically manufactured goods using imported raw materials to rise due to a shortage of imported finished goods in a number of sectors. Fitch believes curtailment of raw material and capital goods imports used for domestic value addition is less likely in the near term, as such imports support the country’s long-term import substitution drive.

Foreign-currency reserves fell to USD4.0 billion in May 2021 (May 2020: USD6.5 billion), due to weak tourism receipts amid the coronavirus pandemic and a sharp rise in the price of crude oil, a major import. Consequently, import cover stood at 2.5 months in May 2021, against 6.5 months in May 2020. Foreign reserves are also pressured by large debt maturities of around USD4 billion per annum until 2026.

Fitch-Polarised-Impact-on-Sri-Lanka-Corporates-from-Weak-Sovereign-External-Finances-2021-07-22