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Sri Lanka: Fitch downgrades Long-Term Foreign-Currency IDR to 'CC' from 'CCC'

  • Fitch downgrades SL’s IDR as reserves dip to USD 1.6bn in November

  • Funding lines outlined by the CB materializing a crucial factor at this point

  • Fitch expects Sri Lanka to grow 2.2% in 2022; we factor in higher GDP growth amidst a rapid vaccination drive

Asia Securities
20 December 2021
Published byAsia Securities

Fitch downgrades SL’s IDR as reserves dip to USD 1.6bn in November

  • Fitch downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’ earlier. The downgrade highlights the view of a higher probability of default in 2022 given the country’s weak external liquidity position. Fitch also highlighted the country’s move of adding downward pressure on the currency thereby creating further financial stress to the system.

  • Recent media reports indicate that the country’s repayment schedule for 2022 stands at USD 7.4bn.

  • In terms of repayments, our discussions indicate that the Central Bank plans on rolling over possible debt obligations, while ensuring adequate Dollar inflows to meet its debt obligations. However, at this juncture, we see heightened pressure on the repayment schedule in the absence of high volume inflows.

Funding lines outlined by the CB materializing a crucial factor at this point

  • As highlighted in our previous reports, Fitch stated that while the Central Bank noted a comprehensive pipeline of inflows, the timing and availability of these external resources remain unclear.

  • While our discussions indicate that the CB expects USD 400mn from a swap with India and a number of negotiations are underway for the long term lease of land, the value and timing of these is not disclosed. Given that negotiations for the sale of under-utilized assets is likely a medium-term funding solution, we expect the CB to continue its dependance of Government-to-Government funding and swap negotiations, specially given the current ratings by all three rating agencies (Moody’s – Caa2 ‘Stable’, S&P - CCC+ ‘Negative’).

  • At this juncture, we emphasise that strengthening reserves ahead of the 2022 repayment schedule is key. While we continue to expect the Central Bank to meet its January ISB maturity payment of USD 500mn, we see heightened need for a debt restructuring program in the absence of any credible inflows. We see a low probability of an upward re-rating in the near term.

Fitch expects Sri Lanka to grow 2.2% in 2022; we factor in higher GDP growth amidst a rapid vaccination drive

  • Along with the downgrade, Fitch also revised down its growth expectation for Sri Lanka to 2.2% YoY from 3.6% YoY previously. In our view, the current COVID-19 vaccination drive indicates low probability of lockdowns in 2022. This combined with higher economic momentum and a rebound in tourism is likely to lead to 4.2% - 4.4% GDP growth in 2022. However, we note that the ongoing Dollar liquidity combined with heightened inflation could dampen momentum to some extent.