Moody’s downgrades Sri Lanka to ‘very high credit risk’ rating; nation asserts ability to meet debt obligations

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The agency said the country would be hard-pressed to secure funding for its external debt service payments amounting to approximately $4 billion annually

Colombo: Moody’s on Monday downgraded Sri Lanka’s sovereign credit rating by two notches, saying the South Asian nation would be hard-pressed to secure funding to service its huge foreign debt.

Sri Lanka was pushed down from “B2” (high credit risk) to “Caa1” (very high credit risk), as the coronavirus pandemic compounded its economic woes, Moody’s said in a statement.

“Moody’s expects government liquidity and external risks to intensify, as the government’s external debt service payments amount to approximately $4 billion (annually) between 2020 and 2025,” it said.

Wide budget deficits in the next few years are likely to require at least partial external financing, which is increasingly difficult to access, the international ratings agency said.

Sri Lanka’s government quickly dismissed the downgrade as without merit. “Moody’s ratings downgrade unwarranted, analysis erroneous and suggests reckless reaction,” the finance ministry said.

It said the government had “repeatedly expressed its ability and willingness to meet all its debt obligations.”

The ministry said Sri Lanka’s foreign reserves had improved to $7.4 billion by the end of August as exports picked up to the pre-pandemic level of $1 billion a month.

The trade balance improved due to restrictions on non-essential imports, the ministry said, referring to a ban on vehicles and luxury goods in place since March.

Sri Lanka’s economy contracted by an unprecedented 1.6 percent in the first quarter of this year, after a 2.3 percent economic expansion last year.

Moody’s said it expected Sri Lanka to repay its $1.0 billion debt maturing next month by drawing down its foreign reserves, but that would “further deplete already thin external buffers.”

Sri Lanka imposed nationwide curfews between March and June in a bid to contain the spread of the coronavirus, which has so far infected more than 3,300 people and claimed 13 lives.

The country has eased a lockdown, saying there had been no community spread of the virus for two months.

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