S&P downgrades Sri Lanka to CCC-plus on fiscal deterioration

Singapore, December 11 : S&P Global Ratings on Friday lowered its long-term foreign and local currency sovereign credit ratings on Sri Lanka to CCC-plus from B-minus.
It also lowered short-term foreign and local currency credit ratings to C from B. The transfer and convertibility assessment was revised to CCC-plus from B-minus. But the outlook is stable, said S&P.
"We lowered our ratings on Sri Lanka based on our assessment that risks to debt-servicing capacity have risen as the government's access to external financing has become increasingly dependent on favourable business, economic and financial conditions."
S&P said the downgrade stems in part from the impact of COVID-19 which has significantly narrowed the government's fiscal space and its capacity to generate earnings through sectors such as tourism.
The latest expansionary budget measures are likely to further 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 ratings on Sri Lanka reflect the country's relatively modest income levels, weak external profile, sizable fiscal deficits, heavy government indebtedness and hefty interest payment burdens.
However, the stable outlook reflects that, at this lower rating level, risks to Sri Lanka are relatively balanced over the next 12 months. Risk of external deterioration is partially offset by accommodative policies that are likely to boost domestic demand recovery.