International ratings agency Fitch downgraded cash-strapped Sri Lanka Saturday by one notch to “CC” due to mounting fears of a sovereign default on its $26 billion foreign debt.
The downgrade came a day after Sri Lanka reported a 1.5% contraction in the third quarter of this year as a foreign exchange crisis wrecked its recovery from the coronavirus pandemic.
“The re-emergence of the Covid-19 pandemic and the resultant disturbances to production activities appear to have affected the ongoing recovery somewhat during the third quarter of 2021,” the Central Bank of Sri Lanka said in its most recent monetary policy review.
Fitch said the downgrade reflected its view of an “increased probability of a default event in coming months” as Sri Lanka’s foreign reserves slumped to $1.58 billion at the end of November.
“The economic situation in Sri Lanka is going from bad to worse, with a surge in inflation undermining the credibility of the central bank and making a debt default all the more likely,” Gareth Leather, senior Asia economist at Capital Economics, said.
External Debt Obligations
Fitch said it would be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new financing sources.
The agency noted Sri Lanka had to repay two international sovereign bonds of $500 million in January 2022 and $1 billion in July 2022 with little improvement in capital inflows into the nation of 21 million people.
Foreign-currency debt service payments, including principal and interest, for next year total $6.9 billion, or the equivalent of nearly 430% of the island’s official gross international reserves as of November 2021.
“Cumulative foreign-currency debt service, including interest and principal, amounts to about $26 billion from 2022 through to 2026,” Fitch said.
- AFP, with George Russell