S&P Downgrades Sri Lanka on Debt Servicing Risks as Covid Narrows Govt’s Fiscal Space

Rating agency S&P slashed Sri Lanka’s credit rating to “CCC+/C” on Friday on concerns that risks to the country’s debt-servicing capacity have risen as the impact of COVID-19

pandemic has significantly narrowed the government’s fiscal space. S& P’s downgrade from “B-” follows Fitch and Moody’s taking similar action recently.

“We lowered our ratings on Sri Lanka based on our assessment that risks to debt-servicing capacity have risen, as the government’s access to external financing has become increasingly dependent on favourable business, economic, and financial conditions,” the New York-based agency said in a statement. “The downgrade stems in part from the impact of COVID-19

, which has significantly narrowed the government’s fiscal space and its capacity to generate earnings through sectors such as tourism,” it said.

The latest expansionary budget measures are likely to further weaken the government’s fiscal position. High fiscal deficits and excessive domestic liquidity will put downward pressure on the exchange rate and worsen the risks associated with the government’s already-high debt burden, it added. The ministry of finance expressed surprise at the latest downgrading by the rating agency Standard and Poor’s claiming that the agency ignored the positive outcomes expected from the government’s 2021 Budget which was passed on Thursday. The ministry charged that S&P grossly overstated the level of fiscal deficit and the external deficit.

The ministry has rejected the S&P projection that government debt to GDP ratio would be over 100 per cent from 2021.