government debt

S&P downgrade compounds Sri Lanka’s foreign debt worries

Agence France-Presse

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S&P downgrade compounds Sri Lanka’s foreign debt worries

COLOMBO. A mahout rides an elephant among the traffic down a street in Piliyandala, a suburb of Sri Lanka's capital Colombo, on September 27, 2020.

Photo by Lakruwan Wanniarachchi/AFP

S&P Global Ratings says Sri Lanka's existing funding sources do not appear sufficient to cover its debt servicing needs estimated at just over $4 billion in 2021

S&P Global Ratings downgraded Sri Lanka by one notch on Friday, December 11, as international credit agencies worried over the island’s ability to service its foreign debt.

The New York-based agency said Sri Lanka’s existing funding sources did not appear sufficient to cover its debt servicing needs estimated at just over $4 billion next year.

“This means that Sri Lanka may need external commercial funding, which can be difficult and costly,” the ratings agency said in its latest report on the island.

“We see increasing indications that funding from multilateral or bilateral partners will not be sufficient to cover external financing needs over the next 12 months.”

The negative credit report came just two weeks after Fitch cut Sri Lanka’s credit score, expressing similar fears over Colombo’s ability to repay its foreign loans.

Two months ago, Moody’s had also downgraded Sri Lanka by two notches, saying Colombo would struggle to secure funding.

International agencies have also noted that Sri Lanka’s economy was already weak when it went into the coronavirus pandemic which had made revenue generation even more challenging.

S&P said Sri Lanka’s budget for 2021 envisaging tax cuts for local industries and individuals would only weaken the government’s fiscal position.

“High fiscal deficits and excessive domestic liquidity will put downward pressure on the exchange rate and worsen the risks associated with the government’s already-high debt burden,” S&P said.

It expected Sri Lanka’s economy to shrink by a record 5.3% this year.

Sri Lanka’s junior finance minister Nivard Cabraal expressed hope that investors would not be “distracted” by rating downgrades.

Sri Lanka is a close ally of China and is banking on investments from Beijing companies in the new year, according to the 2021 budget unveiled last month.

“It is very likely that investors who have placed trust in Sri Lanka’s potential will not be distracted by ill-advised and subjective comments made by hostile external spectators,” Cabraal said in a statement shortly after the S&P downgrade.

He accused unnamed “biased agencies that are operating under an independent label,” of trying to undermine confidence in Sri Lanka’s economy after the pro-China government came to power last year. –

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