Moody’s further downgrades Sri Lanka’s debt rating to Caa2

Ratings agency Moody’s Investors Service has downgraded Sri Lanka’s sovereign rating to Caa2 from Caa1, taking the country’s credit deeper into speculative grade as foreign reserves continued to fall amid money printing and crippled forex markets.

“The decision to downgrade the ratings is driven by Moody’s assessment that the absence of comprehensive financing to meet the government’s forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks.” 

“A large financing envelope that Moody’s considers to be secure remains elusive and the sovereign continues to rely on piecemeal funding such as swap lines and bilateral loans, although prospects for non-debt generating inflows have improved somewhat since Moody’s placed Sri Lanka’s rating under review for downgrade,” the rating agency said.

In turn, this assessment reflects governance weaknesses in the ability of the country’s institutions to take measures that decisively mitigate significant and urgent risks to the balance of payments, the statement said.

External liquidity risks remain heightened. A large financing envelope that Moody’s considers to be secure remains elusive and the sovereign continues to rely on piecemeal funding such as swap lines and bilateral loans, although prospects for non-debt generating inflows have improved somewhat since Moody’s placed Sri Lanka’s rating under review for downgrade.” 

Persistently wide fiscal deficits due to the government’s very narrow revenue base compound this challenge by keeping gross borrowing needs high and removing fiscal flexibility, the ratings agency stated.