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Fitch hits Sri Lanka with another downgrade as Colombo reacts angrily

Fitch Ratings announced this morning that it has downgraded the Bank of Ceylon's (BOC) Long-Term Foreign- and Local-Currency Issuer Default Ratings just days after it announced a similar downgrade for Sri Lanka, with the government in Colombo lashing out at the agency for its decision.

This morning Fitch stated that the BOC's ratings “are constrained by the sovereign rating” issued on November 27. “We do not anticipate developments that might lead to positive rating action in the near-term given the pressure on the sovereign rating and the deteriorating operating environment,” the agency added.

“We lowered BOC's risk appetite score to 'ccc'/negative to reflect heightened risk from its significant exposure to the sovereign and non-state exposures that could be susceptible to deteriorating operating conditions,” the agency said, noting that the bank’s loans rose and that the bank “may be asked to take the lead in supporting businesses and individuals affected by the pandemic”.

Last month, Fitch downgraded Sri Lanka’s ratings, highlighting the “increasingly challenging external-debt repayment position over the medium term” and “in particular, a sharp rise in the sovereign debt to GDP ratio associated with the coronavirus shock and narrowing financing options have heightened debt sustainability risks”.  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 added.

Sri Lanka’s finance ministry reacted angrily to the sovereign downgrade, stating “we do not accept this downgrade as it fails to recognize the robust policy framework of the new Government for addressing the legacy issues, including the concerns raised by Fitch Ratings, and ensuring ongoing economic recovery and macroeconomic stability of the Country”.

“It is surprising to note that Fitch Ratings’ assessment has ignored several key proposals presented in the Government Budget 2021,” the ministry claimed, adding that the international ratings agency had made “unfounded assumptions”.

“The rating action announced today is based on these ill-informed model projections, without any evidence-based and objective analysis,” Colombo added.

“Such action simply demonstrates the prejudicial approach of Fitch Ratings, and lacks due consideration to alternative strategies that the Government is committed to embark on in the period ahead. Practices of this nature by an international rating agency without a constructive engagement with the Government on the promising alternative, policy approaches are likely to make the agency concerned completely irrelevant as the country rises strongly in the period ahead.”

Fitch however, projects Sri Lanka’s economic crisis to worsen, with approximately $4 billion of debt repayments due annually until 2025 and the government’s debt-to-GDP ratio to increase to about 100% in 2020 from 86.8% in 2019, and to rise to around 116% in 2024.

"Clearly default is a last resort for the government and would be a blow to their credibility because they have been talking a big game," said Kevin Daly, a portfolio manager at Aberdeen Standard Investments.

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