Moody’s downgrades Sri Lanka on political crisis

„Cuts credit rating to B2 from BI and changes outlook to ‘Negative’ „Says current political crisis exacerbates SL’S refinancing risks „Expects slower pace of fiscal consolidation amid political turmoil

Delivering the first major blow to crisis-ridden Sri Lanka’s economy, Moody’s Investors Service yesterday downgraded the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings to B2 from B1 and changed the outlook to ‘Stable’ from ‘Negative’.

At the same time, Moody’s lowered the local-currency bond and deposit ceilings to Ba2 from Ba1. The foreign currency bond ceiling was lowered to Ba3 from Ba2 and the foreign currency deposit ceiling was lowered to B3 from B2.

Citing reasons for the downgrade, Moody’s said the current political turmoil in Sri Lanka has exacerbated the country’s debt refinancing risks amid the tightening of external and domestic financing conditions and low foreign reserve adequacy.

The rating agency recently placed Sri Lanka among Maldives (B2 negative), Mongolia (B3 stable), and Pakistan (B3 negative), who are particularly vulnerable to tightening external financing conditions, as the country’s large external financing needs and substantial foreign currency government debt raise its vulnerability.

Moody’s also noted that even if the current political crisis is resolved quickly, it has heightened refinancing risks beyond levels anticipated when the rating agency affirmed the rating at B1 with a ‘Negative’ outlook in July.

Further, Moody’s projections include a slower pace of fiscal consolidation than assumed in July to reflect disruption to fiscal policy implementation in a period of political turmoil.

Sri Lanka is now in a political deadlock situation with President Maithripala Sirisena sacking his Prime Minister Ranil Wickremesinghe and appointing the former President Mahinda Rajapaksa in his place on October 26.

The subsequent dissolution of parliament by Sirsena, which is now being challenged at the country’s highest court, has plunged Sri Lanka into further chaos.

Meanwhile, Moody’s said Sri Lanka’s debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk.

However, the rating agency expects that despite the current political crisis, any future government will remain broadly focused on implementing important fiscal, monetary and economic reforms that would strengthen the credit profile over the medium term.

Sri Lanka’s Central Bank last Wednesday assured that it has lined up various sources of funding to settle the maturing international bonds and other foreign borrowings next year, despite the political turmoil currently brewing in the country.

Central Bank Governor Dr. Indrajit Coomaraswamy revealed that three State-run banks—bank of Ceylon (BOC), National Savings Bank (NSB) and People’s Bank (PB) would together raise US $ 750 million to US $ 1 billion from the Middle East before the end of this year, while noting that the government has decided to upscale the term loan arrangement with China Development Bank by US $ 500 million.

He further revealed the Central Bank is now in consultation with central banks in Qatar and Oman for swap arrangements. He said these swaps would be negotiated below the yield curve of international sovereign bonds.

Dr. Coomaraswamy also said they haven’t abandoned the plans to go for Samurai and Panda bond issues as announced earlier.

Further, he did not rule out the possibility of going for an international sovereign bond issue as previously announced.

Sri Lanka has to settle a US $ 1 billion sovereign bond maturing in January 15, 2019 and another US $ 500 million sovereign bond maturing in April.

The country will also have to keep on raising funds from various sources at least for the next few years, as the country has to settle US $ 4 billion on average for five years, starting next year.

The Central Bank Governor said as of November 14, Sri Lanka’s foreign reserves stood at US $ 7.2 billion, down from US $ 7.2 billion, partly due to a US $ 500 million payment under the Asian Clearing Unit.

The Central Bank hopes to end the year with US $ 7.8bn foreign reserves.