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Sri Lanka

Sri Lanka suffers credit rating cuts after nearly six weeks of political turmoil

  • All three major credit rating agencies have now downgraded the island nation’s status, amid concerns it will be unable to refinance its debts
PUBLISHED : Tuesday, 04 December, 2018, 11:09pm
UPDATED : Wednesday, 05 December, 2018, 12:48am

Two international credit rating agencies downgraded Sri Lanka by one notch on Tuesday after almost six weeks of political crisis.

Fitch said it believed Sri Lanka’s political upheaval, which began with the sacking of its prime minister in October and has disrupted the functioning of parliament, exacerbates the Indian Ocean nation’s external financing risks.

Along with Standard & Poor’s, it warned that Sri Lanka was heading for tougher times with politics complicating the effects of a challenging external environment.

“Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate,” Fitch said.

Fitch downgraded Sri Lanka from B+ to B, while Standard & Poor’s also cut its rating from B+ to B. The third major rating agency, Moody’s, downgraded the island nation on November 20.

Fitch said plans to raise funds through bilateral and commercial borrowing, or through the exercise of foreign currency swaps, could be challenging, though it rated its outlook at “stable”, meaning it saw a longer-term recovery for the economy that was badly hit by weather-related disruptions in 2016 and 2017. Meanwhile, Standard & Poor’s said there had been a “significant erosion” in the political situation that could affect Sri Lanka’s ability to refinance its debts.

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“It is a mess at the moment,” said a finance ministry official, on condition of anonymity.

“We have to come out of this dragging political crisis. The borrowing cost is anyway going to rise with this.”

President Maithripala Sirisena told a meeting of his Sri Lanka Freedom Party the crisis would end “in the next seven days”, without elaborating.

The central bank said in a statement that the downgrades by Fitch and S&P were based on “uncorroborated facts on the country’s macroeconomic fundamentals”.

Before the downgrade by Standard & Poor’s, Central Bank Senior Deputy Governor Nandalal Weerasinghe said Moody’s and Fitch had been “too hasty”. “Such uncertainties could be very short-lived,” he said.

The rupee has weakened nearly 17 per cent this year, while yields on dollar bonds due in 2022 have risen by more than a percentage point to 8.24 per cent since the crisis began.

Sirisena’s economic adviser said last month that “alternative finance” raised locally would service much of Sri Lanka’s US$4.5 billion in foreign debt repayments due in 2019.

He said Sri Lanka would seek to extend a US$1 billion loan from China by an additional US$500 million, but would only turn to international markets for cash “as a last resort”.

Sri Lanka’s unrest has also prompted the International Monetary Fund to suspend a tranche of a US$1.5 billion bailout loan agreed to in 2016.

Sri Lankan court blocks Mahinda Rajapakse from acting as prime minister

The country’s political crisis began on October 26 when Sirisena removed Ranil Wickremesinghe as prime minister and replaced him with the flamboyant but controversial Mahinda Rajapakse.

However, with Wickremesinghe’s supporters still controlling a majority in parliament, Rajapakse has lost two votes of confidence.

On Monday, the Court of Appeal denied Rajapakse the authority to act as prime minister and stripped his cabinet of their powers, giving Rajapakse until next Wednesday to prove his legitimacy.

Additional reporting by Reuters