Fitch Ratings yesterday cut Sri Lanka’s credit rating by one notch to B+ with a negative outlook, weeks after it asked for a bailout from the International Monetary Fund.
The ratings agency said the island’s mounting debt, depleted foreign exchange reserves and evidence of capital flight had led to the downgrade.
The move is a signal to investors that Sri Lanka’s sovereign debt is now considered riskier, and will make it more expensive for the country to borrow on international markets.
Fitch also downgraded its outlook for the economy from stable to negative, the second such rank reduction in nearly eight years.
The last downgrade, also by one notch, in April 2008 came just before a major balance of payments crisis.
Sri Lanka secured a $2.6bn loan from the IMF in 2009 to boost its financial reserves, which dropped below $1bn at the height of the civil war between Tamil Tiger rebels and the army.
Fitch’s latest assessment on Sri Lanka is based on the assumption that the country will not slip back into a separatist war that claimed at least 100,000 lives between 1972 and 2009.
“In Fitch’s view, (the latest downgrade) partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral
institutions,” its statement said.
Sri Lanka is currently in bailout talks with the IMF, although the sum it is seeking has not been disclosed.
The IMF, which sent a mission to review Sri Lanka’s economy earlier in February, said it had warned the authorities they should make a “stronger effort” immediately to reduce the deficit.
The government went on a spending spree after taking power in January 2015 to deliver on election promises of higher wages and lower prices.
But the move increased the country’s deficit and sparked concern over balance of
payments.
Ten days ago, the Central Bank of Sri Lanka raised key interest rates by 50 basis points in a bid to slow credit expansion and discourage imports.
The island nation last week received pledges of over $2bn in loans and equity from the Asian Development Bank over three years.