ECONOMYNEXT – Sri Lanka’s restricted default (RD) rating could be removed after debt restructuring is complete, and relations with commercial creditors are normalized, Fitch Ratings said.
With the new administration endorsing a deal with sovereign bondholders, political risks have to debt restructure has receded, Fitch said.
Foreign Minister Vijitha Herath said the administration decided to go ahead with the deal negotiated shortly before the Presidential elections because delays could lead to bigger problems for the economy.
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Fitch put Sri Lanka’s long term foreign currency rating (the Issuer Default Rating) at RD in May 2022 after coupon payment was missed.
“We may move the IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community,” Fitch said.
Sri Lanka’s sovereign bonds and also a loan from China Development Bank has been classified as commercial debt.
“Sri Lanka’s post-default rating would depend upon our assessment of its credit profile,” the rating agency said.
“Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-‘ in September 2023, reflecting the completion of the local-currency portion of Sri Lanka’s domestic debt optimisation plan.”
Sri Lanka’s debt to GDP ratio is expected to be high under an IMF projection but so far tax revenues are picking up strongly.
The full statement is reproduced below.
Political Risks to Sri Lanka’s Debt Restructuring Agreement Recede
Fitch Ratings-Hong Kong-09 October 2024: The Sri Lankan authorities’ confirmation that they endorse the targets set under the country’s IMF programme, and intend to implement debt restructuring based on the terms agreed with international sovereign bondholders in September, reduces risks to the debt treatment process associated with the outcome of the presidential election on 21 September, says Fitch Ratings.
The election of Anura Kumara Dissanayake, of the opposition Janatha Vimukthi Peramuna (JVP), as president in September had increased policy uncertainty, raising the risk that the government could launch challenges to key elements of the IMF programme, potentially delaying Sri Lanka’s foreign-currency debt restructuring. However, the Ministry of Finance announced on 4 October that consultations with the IMF and Sri Lanka’s Official Credit Committee had been successfully concluded, suggesting that any policy changes are unlikely to threaten the IMF programme or the debt treatment agreement-in-principle reached under the previous administration.
The Ministry also indicated that the consultation had agreed that the preliminary agreement adhered to the principle of comparability of treatment between official creditors and bondholders, and was compatible with the IMF programme’s terms. We view this as a positive sign for the restructuring process’s prospects.
Fitch has rated Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ (Restricted Default) since May 2022, and the government is not currently servicing its foreign-currency debt. We may move the IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community.
Sri Lanka’s post-default rating would depend upon our assessment of its credit profile. Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-‘ in September 2023, reflecting the completion of the local-currency portion of Sri Lanka’s domestic debt optimisation plan.
We expect Sri Lanka’s government debt to remain relatively high, even if debt restructuring is completed successfully along the lines laid out in the agreements with its creditors. The IMF forecasts Sri Lanka’s gross general government debt/GDP ratio to decline only gradually to about 103% of GDP by 2028, from about 116% in 2022, after building in a local- and foreign-currency debt restructuring.