Fitch downgrades Sri Lanka as default fears loom

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Ratings agency Fitch downgraded Sri Lanka’s sovereign debt to “CCC” on Friday, warning that the country was at increasing risk of missing debt payments due to the coronavirus pandemic. Heavily reliant on tourism and garment exports for foreign exchange reserves, the island nation has been hit hard by the pandemic, which has dampened consumer demand and curtailed almost all global travel this year. The CCC rating means Fitch considers default to be “a real possibility”.

“We think there are now increasing risks to Sri Lanka’s ability to meet its external debt repayments,” Fitch analysts said in a note. Sri Lanka has around $4 billion of debt repayments due annually until 2025, while total foreign exchange reserves stand at just under $6 billion.

Earlier this month Finance Minister Mahinda Rajapaksa presented an ambitious budget that aimed to more than halve the fiscal deficit over the medium term. But Fitch said it expected the country’ fiscal position to worsen, not improve, over the next few years.

It expects Sri Lanka’s government debt-to-GDP ratio to increase to about 100% in 2020 from 86.8% in 2019, and to rise to around 116% in 2024. This is in sharp contrast to Sri Lanka’s own targets, which see a reduction in debt-to-GDP to 75.5% in 2025, from an estimated 95.1% in 2020.

Spokesmen for Sri Lanka’s finance ministry did not immediately respond to a request for comment. The ministry said in September that a similar downgrade by Moody’s was “reckless” and “unwarranted”, noting Sri Lanka has consistently received support from India and China.

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