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Sri Lanka: S&P lowers Sovereign rating to B-; Outlook ‘Stable’

  • Continued losses at State-Owned Enterprises highlighted as key risk

  • Expectation of bilateral and multilateral assistance keeps the outlook at “Stable”

  • Low probability of a further downgrade in the near term in our view

Sri Lanka: S&P lowers Sovereign rating to B-; Outlook ‘Stable’
Asia Securities
21 May 2020
Published byAsia Securities

S&P downgraded Sri Lanka’s Sovereign credit rating from ‘B Negative’ to ‘B- Stable’ yesterday, owing to fiscal and debt repayment concerns. The expectation of bilateral and multilateral assistance to help the country meet its near-term debt obligations keeps the outlook at “Stable” in the lower rating category. This follows Fitch Rating’s rate cut to B- with a Negative outlook in late April, while Moody’s has placed the Sovereign rating under review.

According to S&P, Sri Lanka’s fiscal position looks to widen owing to the January tax cuts and import controls resulting in lower government revenue. S&P states that this, in turn will worsen the risk associated with the country’s debt repayments. In addition, the rating agency expects the currency depreciation (we forecast a 12.2% - 16.0% YoY depreciation) and a smaller revenue base to adversely impact interest repayments, resulting in interest payments reaching 67.2% of revenues in 2020 (47.7% in 2019).

A key concern highlighted is the risk arising from continued losses in State-Owned Enterprises, namely the Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB) and Sri Lankan Airlines (SLA). While lower global oil prices are likely to help curb losses at CPC and CEB, S&P expects SLA to face continued losses owing to the COVID-19 impact on tourism. 

S&P stated that 1) non-materialisation of multilateral and bilateral assistance and 2) greater deterioration of external imbalances leading to a sustained decline in forex reserves will result in a further downgrade as a result of debt servicing concerns.

A credible improvement in the country’s fiscal and debt metrics could lead to an upward rating, according to S&P. 

While at this point we do not see a high probability of a further downgrade, we do not expect an upward revision in the near term. We expect pressure on reserves owing to low inflows amidst the current backdrop. As such, we forecast reserves to end the year at ~USD 4.9bn – USD 5.8bn covering 3.2 – 3.8 months of imports.

2020 forecasts S&PAsia Securities

GDP growth (%)

(0.3)

(4.0) - (4.5)

Fiscal deficit (% of GDP)

8.0

8.9 - 10.7

Government revenue (% of GDP)

< 10.0

8.5 - 11.00

Current account deficit (% of GDP)

3.4

4.0 - 4.5

Govt debt (% of GDP)

> 90.0

87.0 – 95.0

Source: S&P, Asia Securities