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Moody’s Cuts Sri Lankan Credit Rating; Outlook Stable
Posted 21,April

By Chehan Jayasuriya

In Local News

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Joining Fitch and S&P, Moody’s Investors Service downgraded Sri Lanka’s sovereign rating to Ca from Caa2, the 2nd lowest on their scale of ratings. The move follows Sri Lanka’s decision to suspend payments of most of its foreign currency-denominated debt last week.

Nevertheless, the outlook on the Sri Lankan sovereign was left Stable by Moody’s, which reflects its view tgat the private sector creditor losses in the eventual debt restructuring will likely be consistent with the levels associated with the Ca rating, although with an upside.

“On the upside, any agreement with multilateral development partners that unlocks significant external financing may gradually restore foreign investor confidence and crowd in private sector investment,” the rating agency said. 

“Combined with Sri Lanka’s tourism potential, a rapid recovery of foreign exchange inflows may limit the losses to private sector creditors,” it added. 

However, downside risks also remain in the form of extensive delays in fiscal reforms and the inability to secure a large external financing envelop which together might result in even larger losses to the creditors, Moody’s cautioned.  Moody’s estimated losses at between 35 to 65 percent for the creditors drawing from the precedents set by countries, which went into default with a rating at a similar level to Sri Lanka’s which is now at Ca.

Meanwhile, Sri Lanka expects to draw down its full quota of SDR it has with the International Monetary Fund (IMF), which comes to about US$ 3-4 billion in a 3-year economic stabilisation programme under an Extended Fund Facility. 

Supplementing that would be the disbursements from other multilateral financiers such as the World Bank, the Asian Development Bank et.al., and potentially more from India which last week assured a further US$ 2.0 billion worth assistance to Sri Lanka on top of its already committed US$ 1.9 billion thus far.