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Central Bank reiterates Road Map post downgrade

20 Dec 2021

  • Says decision to downgrade by Fitch a ‘hasty move’
  • Fitch downgrades SL to ‘CC’ due to increased default possibility
  • Sri Lanka three notches away from default
By Imsha Iqbal After Fitch Ratings downgraded the long-term foreign currency Issuer Default Rating (IDR) of Sri Lanka to “CC”, the Central Bank of Sri Lanka (CBSL) stated that the Six-Month Road Map for Ensuring Macroeconomic and Financial System Stability articulated the expected cash flows by December 2021 and March 2021, but Fitch has “completely” ignored them. Issuing a press release, the CBSL stated that the Government and the CBSL remain confident that these inflows will materialise and that the end-2021 level of gross official reserves will remain above $ 3 billion, but Fitch appears to have completely ignored the standby swap facility with the People’s Bank of China of $ 1.5 billion, the drawing of which is imminent. “The credit lines and other inflows expected following high-level meetings in India and the Middle Eastern and other regional economies are also not given due consideration by Fitch in arriving at this decision,” the press release stated. The CBSL said that “Fitch has demonstrated its failure to recognise the positive developments taking place in Sri Lanka, in an environment in which the entire world is grappling with multiple waves of the Covid-19 pandemic”, while stating that the recent downgrade that took place last Friday (17) is similar to the downgrade by Moody’s Investor Service which took place prior to Budget 2022. The CBSL press release pointed out that despite foreign currency inflows being low, worker remittances are expected to flow in due to the resumption of increased demand in worker migration and direct investments such as Port City Colombo and industrial zones, along with the country’s rapid vaccination drive. It added that contrary to Fitch’s unfounded claims on the increased probability of a default event over the coming months, the measures undertaken by the Government and the CBSL to secure support from friendly nations in the region are nearing fruition, thereby offsetting pressures on the balance of payments (BOP) in the period ahead. It added that the fact that Fitch Ratings decided to downgrade Sri Lanka without waiting until the the first test date of 31 December 2021 shows nothing but recklessness, which could only hurt investors if decisions are made based on this downgrade, and added that the Government has given clear assurance that Sri Lanka will honour all debt obligations in the period ahead, and Sri Lanka has not delayed a single payment even under severe stresses that were caused by the Covid-19 pandemic over the past two years. However, the Fitch statement, which was issued last Friday, noted: “The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government bond yields and downward pressure on the currency.” It also explained that foreign currency in the country, in fact, dwindled rapidly than assumed by the said rating agency. After the recent downgrade by Fitch, Sri Lanka stands a mere three notches away from a “D” rating, which indicates “debt default”. Fitch further stated: “Foreign exchange reserves have declined by about $ 2 billion since August, falling to $ 1.6 billion at end-November, equivalent to less than one month of current external payments. This represents a drop in foreign currency reserves of about $ 4 billion since end-2020.” Further, Fitch highlighted that the Government of Sri Lanka is still contemplating International Monetary Fund (IMF) assistance as per press reports, while stressing that restructuring debt would be more sustainable. Moreover, Fitch added: “We also believe it is unlikely that Sri Lanka will meet its 2025 government debt reduction target of about 89% of GDP (gross domestic product) or narrow the fiscal deficit to 4.8% of GDP.” Fitch downgraded Sri Lanka to “CC” from its previous status of “CCC”, while stressing that Fitch neither assigns outlooks nor applies modifiers for the sovereigns with a rating of “CCC” or below.


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