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Moody’s downgrades Sri Lanka’s ratings in 'huge blow' despite pleas from Colombo

Moody's Investors Service announced that it has downgraded Sri Lanka’s senior unsecured ratings to B2 from B1, amidst a deepening political and economic crisis on the island, despite calls from the government to block the move.

The move, which is a significant blow to the Sri Lankan government’s economic policy, comes as both former president Mahinda Rajapaksa and Ranil Wickremesinghe claim to be Sri Lanka’s prime minister in a political crisis that has endured for several weeks.

“This is the first massive blow to the economy as a result of irresponsible #CoupLK by @MaithripalaS and Rajapaksa clan,” said the UNP’s Harsha de Silva on Twitter.

“We also heard they have received a letter from [Central Bank of Sri Lanka] pleading to reconsider,” he added. “Mess!”

“The decision to downgrade the rating to B2 is driven by Moody's view that ongoing tightening in external and domestic financing conditions and low reserve adequacy, exacerbated most recently by a political crisis which seems likely to have a lasting impact on policy even if ostensibly resolved quickly, have heightened refinancing risks beyond levels anticipated,” said the ratings agency.

“Moody's projections include a slower pace of fiscal consolidation than assumed in July to reflect disruption to fiscal policy implementation in a period of political turmoil.”

Sri Lanka was already racing several economic hurdles before the political crisis was sparked last month. “Moody's assessment is that the government's debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk,” the statement from the ratings agency added.

"The political situation has also resulted in delay to the disbursements planned under the IMF programme," it continued. "A prolonged pause in the IMF programme, associated to uncertainty about the direction of policy, would likely undermine investors' confidence, exacerbating the tightening in financing conditions."

See the full statement here.

The latest move comes amidst calls for sanctions and the withdrawal of trade concessions for Colombo.