Sri Lanka has become good at one thing in recent times. That is, disputing Sri Lanka’s sovereign downgrades by international rating agencies, back to back. In the long list of disputes, the recent one was done for the Fitch Ratings’ downgrade of Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “CCC” from “B-”.
The Fitch downgrade was done on 27 November and the rating reflects Sri Lanka’s “increasingly challenging” external debt repayment position over the medium term and a “sharp rise” in sovereign debt to GDP with the coronavirus shock and narrowing financing options.
As during many previous rating downgrade occasions, the Ministry of Finance issued a statement swiftly, disputing the rating by Fitch and stating that the Sri Lankan Government “does not accept” this downgrade as it fails recognise the “robust policy framework” of the new Government for addressing the legacy issues, including the concerns raised by Fitch Ratings.
After this, on 11 December, S&P Global too downgraded Sri Lanka's long-term sovereign credit ratings to CCC+/C from B-/B, saying the country's fiscal position is expected to deteriorate over the next few years due to a lack of favourable economic and fiscal conditions. The Sri Lankan Government is yet to issue a statement on this downgrade, if they are planning to dispute this downgrade too.
In addition to issuing statements disputing the aforementioned downgrade of Fitch, Prime Minister Mahinda Rajapaksa, who is also the Minister of Finance, referring to the downgrading of Sri Lanka’s credit ratings by rating agencies, stated that ratings of 40 other countries have been downgraded more than Sri Lanka and added that our country has been able to settle borrowings successfully.
This week, The Sunday Morning Business decided to delve into the rating downgrades of a few countries amongst these 40 countries, to find out whether they are really downgraded more than Sri Lanka and whether the number of countries downgraded by Fitch surpass the number of countries that were affirmed or upgraded by Fitch during this time period.
Fitch downgrading of other countries
Around the same time Fitch and S&P downgraded Sri Lanka’s ratings, a number of other countries too have been downgraded by international rating agencies.
Maldives
On 5 November this year, Fitch downgraded Maldives' long-term foreign-currency IDR to “CCC” from “B”. Maldives’ current rating is similar to that of Sri Lanka. Fitch typically does not assign Outlooks or apply modifiers to sovereigns with a rating of “CCC” or below.
According to Fitch, the downgrade of the Maldives' IDRs to “CCC” reflects Fitch's expectation of deeper and more prolonged external liquidity pressures than previously forecast, and a sharp increase in the country's debt burden as a result of the coronavirus shock and continued debt-funded infrastructure spending. Again, factors that prompted downgrading of the Maldives are somewhat similar to that of Sri Lanka.
The rating agency added that in recent months, the authorities have succeeded in securing new external financing, but foreign-currency buffers remain low and it will be difficult for the Maldives to generate foreign exchange inflows without a normalisation of tourist activity.
Suriname
On 1 December, Fitch Ratings downgraded Suriname's long-term foreign-currency (LT-FC) IDR to “RD” from “C”. RD indicates Restricted Default, the penultimate rating on Fitch Ratings’ scale, and this rating supports the Premier’s statement, as it is far worse than Sri Lanka’s downgrade.
According to Fitch, its ratings assigned to Suriname had been unsolicited since 16 January 2020.
The downgrade of Suriname's LT-FC IDR to “RD” and the issue rating on Suriname's $ 550 million 2026 notes to “D” from “C”, followed the Government of Suriname's failure to pay $ 25.4 million in interest due to note holders within the 30-day grace period that expired on 25 November, resulting in a default.
South Africa
On 23 November, Fitch downgraded South Africa's LT-FC IDR to “BB-” from “BB”. The Outlook was Negative. The downgrade and Negative Outlook reflect high and rising government debt, exacerbated by the economic shock triggered by the Covid-19 pandemic. The very low trend growth and exceptionally high inequality will continue to complicate fiscal consolidation efforts. Nevertheless, South Africa’s current rating is better than Sri Lanka with “BB” indicating “speculative”, which means vulnerability to default risk has been elevated.
Zambia
Fitch downgraded Zambia's Long and Short-Term FC IDR to “RD” from “C”, on 18 November. The downgrade of Zambia's LT-FC IDR followed the end of the 30-day grace period for the coupon payment on the $ 1 billion Euro Bond that matures in 2024. The coupon payment was due on 14 October and the grace period ended on 13 November. With RD indicating payment defaults, Zambia’s ratings are certainly not better than Sri Lanka.
Morocco
On 23 October, Fitch Ratings downgraded Morocco's LT-FC IDR to “BB+” from “BBB-”. The Outlook was Stable. According to Fitch, the downgrade reflects the severe impact of the coronavirus pandemic on Morocco's economy and public and external finances. Even though it is a downgrade, Morocco is ahead of Sri Lanka in terms of sovereign ratings.
Malaysia
On 4 December, Fitch Ratings downgraded Malaysia's LT-FC IDR to “BBB+” from “A-”. The Outlook was Stable. This was because the depth and duration of the Covid-19 crisis have weakened several of Malaysia's key credit metrics. However, with “BBB+” indicating “good credit quality” and Sri Lanka’s reflects “substantial credit risk”, our country’s ratings are not even close to that of Malaysia as it is ahead of us.
Armenia
On 5 October, Fitch downgraded Armenia's LT-FC IDR to “B+” from “BB-”. The Outlook is Stable. The sharper than expected economic contraction in H120 and a sizeable downward revision to Fitch’s GDP growth forecasts have put general government debt on a markedly higher trajectory than at their previous review in April.
Fitch now expects government debt to peak at a much higher level and no longer has confidence that it will be placed on a clear downward path over the medium term. Nevertheless, Armenia’s current ratings are ahead of Sri Lanka’s ratings.
Bolivia
Fitch Ratings downgraded Bolivia's LT-FC IDR to “B” from “B+” and revised the Rating Outlook to Stable from Negative, on 30 September. The downgrade of Bolivia's ratings reflects deterioration in the country's growth prospects and public finances amid acute political tensions, which are likely to complicate smooth policy adjustments to contain macroeconomic risks after upcoming elections. With “B” indicating “highly speculative”, Sri Lanka’s “substantial credit risk” status is certainly behind Bolivia.
Laos
On 23 September, Fitch Ratings downgraded Laos' LT-FC IDR to “CCC” from “B-” – just like Sri Lanka. The downgrade of Laos' rating to “CCC” reflects deepening external liquidity pressures as a result of the coronavirus shock and the sovereign's large debt maturities, according to Fitch.
Angola
Fitch Ratings downgraded Angola's LT-FC IDR to “CCC” from “B-”. The downgrade reflects a sizable increase in Angola's government debt, reduced external financing flexibility as evident in a sharp rise in sovereign bond yields, and declining external liquidity. Angola’s current rating matches with that of Sri Lanka.
Upgrades and affirmations
While there has been a number of downgrades by Fitch ratings since September this year, the number of downgrades is certainly lower than the number of upgrades and affirmations announced by Fitch since September.
Switzerland
On 11 December, Fitch affirmed Switzerland's LT-FC IDR at “AAA” with a Stable Outlook. Switzerland's “AAA” ratings and Stable Outlook reflect a diversified and high value-added economy and very strong governance and human development indicators. The rating is supported by Switzerland's very large net external creditor position, high and persistent current account surpluses, and the global reserve currency status of the Swiss franc. “AAA” indicates “highest quality”, which means the lowest expectation of default risk – this is the highest rating Fitch offers.
Spain
On the same day as Switzerland, Fitch affirmed Spain's LT-FC IDR at “A-” with a Stable Outlook. The Covid-19 pandemic has had an increasingly significant impact on the Spanish economy and the sovereign fiscal position. The ratings are nevertheless supported by a high value-added and diversified economy, strong governance indicators, and ease of doing business and human development rankings that are in line with or higher than the “A” peer median. “A” indicates “high credit quality”.
Gabon
On 11 December, Fitch affirmed Gabon's LT-FC IDR at “CCC”. The “CCC” rating reflects Fitch’s view that risks to debt repayment capacity remain high due to ongoing tight liquidity and uncertainties over access to external financing. Gabon’s current rating is similar to that of Sri Lanka.
Mozambique
On 9 December, Fitch Ratings affirmed Mozambique's LT-FC IDR at “CCC”. The “CCC” rating reflects limited financing options combined with high fiscal and external financing needs that have been exacerbated by the coronavirus shock, high general government debt, and ongoing unresolved public-sector debt liabilities. With the affirmed rating, Sri Lanka and Mozambique are in the same rating category now.
Namibia
On 7 December, Fitch affirmed Namibia's LT-FC IDR at “BB” with a Negative Outlook. Namibia's “BB” rating balances comparatively high fiscal deficits and debt against strong institutional features and support to the sovereign's financing flexibility from a developed domestic financial system. The Negative Outlook reflects increased downward pressures on creditworthiness due to a continued rise in general government debt driven by persistent wide fiscal deficits and a protracted recession aggravated by the coronavirus pandemic shock. Namibia is ahead of Sri Lanka in terms of Fitch ratings.
Malta
On 4 December, Fitch affirmed Malta's LT-FC IDR at “A+” with a Stable Outlook. Malta's rating is supported by high per capita income levels, a large net external creditor position, and European Union (EU) and Eurozone memberships. These strengths are balanced against its large banking sector and the small and highly open nature of its economy, which makes it vulnerable to external developments. Again, Sri Lanka is nowhere closer to Malta’s ratings.
Italy
On the same day as Malta’s ratings, Fitch affirmed Italy's LT-FC IDR at “BBB-” with a Stable Outlook. Fitch stated that the Covid-19 pandemic has exerted a significant impact on Italy's economy and the sovereign's fiscal position. The very high government debt and structurally weak economic growth will continue to weigh on the rating. At the same time, the rating is supported by a diversified, high value-added economy, Eurozone membership, and governance and human development indicators that are much stronger than the peer group medians. Italy’s ratings indicate “good credit quality”.
Croatia
On 4 December, Fitch affirmed Croatia's LT-FC IDR at “BBB-”. The Outlook is Stable. Croatia's ratings balance strong structural features, including higher human development, governance indicators and GDP per capita than peers, with weak growth potential and high public sector debt. The Stable Outlook reflects Fitch´s view that the economy will recover gradually from the coronavirus pandemic without significant imbalances and the authorities will achieve medium-term fiscal consolidation, underpinned by substantial EU fund support and a recent track record of fiscal prudence. Croatia’s rating indicates “good credit quality”.
Sweden
On the same day as Croatia’s ratings, Fitch affirmed Sweden's LT-FC IDR at “AAA”. The Outlook is Stable. Sweden's “AAA” rating is consistent with a long record of flexible and effective policymaking, underpinned by strong institutions and very high governance indicators. A well-diversified, high value-added economy, with its high level of domestic savings, sound government balance sheet, and strong external finance metrics, give Sweden capacity to absorb the pandemic shock, supporting the Stable Outlook.
Argentina
On 10 September, Fitch upgraded Argentina's LT-FC and Local Currency IDRs to “CCC” from “RD”. The upgrade of Argentina's rating to “CCC” from “RD” reflects the completion of distressed debt exchanges on its foreign currency sovereign debt securities in both local and external markets that Fitch deems to have cured the default event initiated by missed payments in May and preceded by several local bond re-profiling done via decree. Even though Argentina is now in the same category as Sri Lanka, it is an upgrade from its previous rating.
Ecuador
On 3 September, Fitch upgraded Ecuador's LT-FC IDR to “B-” from “RD”, and assigned ratings of “B-” to the new securities issued as part of a bond exchange. The Outlook is Stable. The upgrade of Ecuador's rating to “B-” reflects the completion of a distressed debt exchange that Fitch deems to have cured the default event initiated by the “consent solicitation” in April. “B” is highly speculative and is above Sri Lanka’s “CCC”.
Paraguay
On 2 December, Fitch Ratings affirmed Paraguay's LT-FC IDR at “BB+” with a Stable Rating Outlook. Paraguay's ratings reflect its track record of prudent and consistent macroeconomic policies anchored by a floating currency, an inflation-targeting regime, and a fiscal responsibility law. The ratings also reflect a general government debt level that is still relatively low despite a steep rise in 2020 and a projected upward trend, along with robust external liquidity relative to “BB” peers.
Guatemala
On 1 December, Fitch affirmed Guatemala's LT-FC IDR at “BB-” and removed the Rating Watch Negative (RWN), upgraded the issue rating on the Eurobond due 2026 to “BB-” from “C”, and affirmed all other ratings. The Rating Outlook is Stable. Guatemala is ahead of Sri Lanka.
What does this mean?
While Sri Lanka might not be alone in terms of downgraded countries, only a few countries have been rated “CCC” and below. Instead of getting comfortable with the fact that “40 other countries are worse than us” and disputing the ratings, Sri Lanka has to adopt swift measures to address its key economic issues pointed out by the rating agencies.
Harvard University John F. Kennedy School of Government Professor of the Practice of Economic Development Ricardo Hausmann recently stated that distinction by rating agencies is really about what the market thinks about Sri Lanka, and not about whether the Ministry of Finance and the market believe in the credit rating agency or not.
