After Fitch Ratings, Standard and Poor's has now downgraded Sri Lanka’s sovereign ratings to ‘CCC’ with a negative outlook from an earlier ‘CCC+’ as its currency continued to be under pressure, indicating the island country may see a sovereign default scenario this year, a prospect the country’s central bank denied.

“The negative outlook reflects our expectation that Sri Lanka’s external financial position will deteriorate further over the coming quarters,” the New York-based rating agency said in its outlook on Wednesday. The pending debt maturities in the coming will further put pressure on the foreign exchange reserves, it added.

“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,” S&P in its projection.  

The island nation has been facing a huge dollar crunch, with its forex touching $1.5 billion in October last year. In December, it rose to $3 billion after Beijing extended Yuan 10 billion ( roughly $1.5 billion). Inflation has skyrocketed, with the high cost of living, and a shortage of essentials. [Read More]

The situation has been dire to the extent that economists are now calling the government to default on a $500 million bond, maturing next week, to save cash for the imports of essentials. However, Central Bank Governor Nivard Cabraal said, “There will be no default, disorderly or otherwise. We do not want to promote a default culture.”  

S&P also said in its projection that it might revise the outlook to stable or upgrade the rating if the government 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. In 2022, the country will have to pay over $5 billion in debt servicing.

Currently, Governor Cabraal also said they were in talks with China  for new loans to pay the debt to China itself in order to avoid default.  Furthermore, Colombo is also expecting over $1 billion lines of credit from New Delhi that will help in its ability to import essential goods. 

The rising debt burden, S&P said, is also hampering the country’s recovery and its ability to stabilize the external sector. The high cost of imports, especially fuel and commodities, is widening the trade imbalance. 

(SAM)