Jan 12, 2022

S&P downgrades SL to CCC, outlook negative

Standard and Poor’s has downgraded Sri Lanka to ‘CCC’ from an earlier ‘CCC+’ with the outlook negative at the lower level as the currency continued to be under pressure from liquidity injections though reserves were boosted in December with a swap from China.
Sri Lanka is now making liquidity injections mostly to sterilize interventions with bond markets operating after price controls were lifted.

If the government signals an intention to restructure commercial debt rating would be further downgraded.

“Foreign exchange resources will be further pressured over the coming quarters by additional external sovereign debt maturities and current account requirements,” the S&P said.

“These developments indicate a rising probability of sovereign default scenarios playing out over the next 12 months in the absence of an unforeseen positive development.”

“The negative outlook reflects our expectation that Sri Lanka’s external financial position will deteriorate further over the coming quarters.

“This would affect Sri Lanka’s ability to service its debt over the next 12 months.”

The rating agency said a “relief package” while boosting economic activity would also weaken the government’s fiscal position and worsened the risks associated with the government’s already-high debt burden.

The handouts mostly went to state workers who were hit by high inflation created by past money printing who were beginning to protest demanding salary hikes.

S&P said it may revise the outlook to stable or upgrade the rating if Sri Lanka can “significantly boost” reserves or its economic recovery is much stronger than expected.

“This could lower the risks associated with the government’s debt-servicing capacity,” the agency said.