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Sri Lanka lashes out at ratings agency for ‘illogical’ downgrade as debt payments pile

The Sri Lankan government launched a scathing attack at Fitch Ratings, after the agency downgraded the country's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR), calling it “illogical and ill-timed”.

Sri Lanka said it “wishes to categorically disagree with the assessment of risks” and slammed Fitch, claiming “their assessment shows rush to judgment and exposes prejudicial nature”.

On Friday, Fitch stated that “the shock to Sri Lanka's economy from the coronavirus pandemic will exacerbate already-rising public and external debt sustainability challenges”.

“The pandemic will especially hurt the tourism sector, which, combined with weaker domestic demand, will further damage Sri Lanka's public and external finance metrics,” the agency said in a statement announcing the downgrade.

General government debt is high and the pandemic has increased risks to public debt sustainability.

Sri Lanka's external financing challenges have increased in the current environment of global risk aversion and financial market volatility, with large upcoming external debt redemptions and limited foreign-currency (FX) reserves. Its reserves are about USD7.2 billion, while the sovereign's external debt payments from May to December 2020 amount to USD3.2 billion, including a USD1.0 billion international sovereign bond payment due in October. Fitch estimates Sri Lanka's external liquidity ratio, defined as liquid external assets/external liabilities, at about 64%, among the weakest in the 'B' rating category.

General government debt is high and the pandemic has increased risks to public debt sustainability. Our baseline forecast is for gross general government debt/GDP to rise to about 94% in 2020 and 96% in 2021, from an estimated 87% in 2019, and to continue rising, increasing the risk of debt distress. This will see gross general government debt stay far greater than the 'B' median of 52%.

See more from Fitch here.

Sri Lanka claimed that the agency “grossly overstates the fiscal deficit in 2020 and the resultant impact of government debt by ignoring the prudent measures taken by the Government to curtail expenditure, and the impact of the delayed government Budget towards the second half of 2020, thereby limiting the fiscal space for additional expenditure for this year”.

See more from the Ministry of Finance here.

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