"Fitch Affirms Sri Lanka at 'CCC'"

CEYLON TODAY | Published: 2:00 AM Jun 16 2021

Global Rating giant Fitch Ratings (FR) on Monday (14) stated that Sri Lanka has the strength and ability to  settle all its foreign-currency debt obligations due in the next few months of this year through existing limited foreign reserves and expected foreign currency inflows.

Considering the above factors, Fitch Ratings has decided to maintain Sri Lanka's credit rating at the current 'CCC' level, but says Sri Lanka has not yet revealed its foreign-currency debt settlement plan for next year. 

According to Fitch, Sri Lanka has to settle $ 29 billion in foreign-currency debt obligations over the next five years (2021-2026) and the country had only $ 4.5 billion in foreign reserves at the end of April. (By the end of May, it had dropped to $ 4 billion). Fitch projects foreign-exchange reserves to remain at about USD 4.5 billion by end-2021 before declining to USD 3.9 billion by end2022. 

But when speaking to Ceylon FT a top economist said, “Reserves number of USD 4.5 Bn as at end - 2021 seems to assume that the People's Bank of China’s (PBoC) US$ 1.5 billion SWAP is in a utilisable form and can be drawn down”. Full statement issued by FR is as follows. “Sri Lanka's 'CCC' rating reflects a challenging foreign-currency sovereign external debt repayment burden over the medium term, low foreign-exchange reserves and high and rising government debt that gives rise to sustainability risks. 

External liquidity pressures have eased somewhat in recent months following bilateral loan disbursements, and our expectation of a forthcoming IMF special drawing rights (SDR) allocation.

 Nevertheless, Sri Lanka's medium-term debt service challenges are substantial and pose risks to the sovereign's debt repayment capacity, in Fitch's view. A total of about USD 29 billion in foreign-currency debt obligations are due between now and 2026, against foreignexchange reserves of USD 4.5 billion as of end-April 2021. 

The authorities have recently secured project financing through various multilateral and bilateral channels, including the Asian Development Bank (AAA/Stable), Asian Infrastructure Investment Bank (AAA/ Stable), China Development Bank (A+/Stable) and The Export-Import Bank of Korea (AA-/ Stable), as well as swap facilities under the South Asian Association for Regional Cooperation (SAARC) currency framework and the PBoC, equivalent to USD 400 million and USD 1.5 billion, respectively. 

The planned IMF SDR allocation would also add USD 780 million to reserves. These resources should enable Sri Lanka to meet its remaining debt maturities through the rest of this year, including a USD 1 billion International Sovereign Bond maturing in July.

However, the authorities have yet to specify their plans for meeting the country's foreign-currency debt-servicing needs for 2022 and the medium term. They have consistently indicated that they do not plan to seek programme financing from the IMF. Sri Lanka's economy contracted by 3.6% in 2020 as a result of the Covid-19 pandemic. We project growth of 3.8% in 2021, down from an earlier forecast of 4.9%, in light of a recent surge in virus cases. 

We expect the economy to grow by 3.9% in 2022. There remains a high degree of uncertainty associated with our forecasts in light of the evolution of new Covid-19 cases in the country. The authorities plan to inoculate 60% of the population by end - 2021, but this target could be hampered by vaccine supply shortages. 

Travel and tourism, an important driver of the economy, have been hit hard and the outlook for recovery remains uncertain, particularly given the recent surge in virus cases. The direct contribution of tourism to pre-pandemic GDP was about 4%, but the indirect contribution was much higher. Tourist arrivals in the first five months of 2021 were 97% lower than the same period last year. 

The general government deficit widened to 11.1% of GDP in 2020, from 9.6% in 2019, as the economic contraction led to a sharp fall in fiscal revenue. We expect the deficit to remain elevated in 2021 and 2022 at 11.1% and 10.4%, respectively. Our deficit projections are wider than those presented by the government under its growth-oriented strategy of 9.4% and 7.5%, respectively. 

Under our forecasts, the revenue-to-GDP ratio in 2021 would rise to 10.9% in 2021 and 11.1% in 2022, compared with the authorities' projections of 11.9% and 13.0%, respectively. The government's fiscal consolidation strategy is based on a planned acceleration in GDP growth, underpinned by tax cuts, as opposed to direct revenue-raising or expenditure measures, albeit supported by planned improvements in tax administration. 

The interest-to-revenue ratio remains high, at around 71% as of 2020, well above the 'CCC' median of 13%. The government expects to achieve primary surpluses from 2023, supported by annual GDP growth of 6%, which appear optimistic in our view as we anticipate growth that is closer to 4%, still above the pace in the immediate prepandemic period. 

General government debt reached 101% of GDP by end-2020, broadly in line with our forecast at our last review in November. Our baseline forecasts suggest this ratio will rise further to 108% by 2022. Fitch does not think the government will meet its 2025 targets of reducing government debt to 70% of GDP and narrowing the fiscal deficit to 4% of GDP. Sri Lanka's basic human development indicators, including education standards, are high compared with those of rating category peers. 

The UN Human Development Index Score positions Sri Lanka in the 62nd percentile, well above the 27th percentile for the 'CCC' median. The country's per capita income of about USD 3,822 is also above the 'CCC' median of USD 2,662. The banking sector is vulnerable to Sri Lankan sovereign weakness due to the banks' significant direct exposure to the sovereign and their domestically focused operations. 

The operating environment for banks remains challenging, and asset quality continues to be a key risk. Reported asset-quality measures at end-2020 - impaired loans for Fitch-rated banks rose to 9.7% by end - 2020 from 9.5% at end - 2019 – likely understate the extent of credit impairment due to forbearance measures”.

CEYLON TODAY | Published: 2:00 AM Jun 16 2021

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