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Govt. slams Moody’s for ‘ill-timed’, ‘ill-judged’ decision

21 Jul 2021

  • Finance Min. refuses to accept rationale behind review
  • Says statement risks scaring away existing investors
  • Points at ‘lined up’ funds
By Imsha Iqbal Sri Lanka expressed dismay at the announcement made by Moody’s Investors Service on  Monday (19), as it has placed Sri Lanka’s rating as “under review for downgrade” in spite of the financial measurements already taken by the Government of Sri Lanka. The Ministry of Finance made this remark issuing a statement on Monday itself, saying the statement that has been made by the aforementioned investor service cannot be accepted as it has been “ill-timed and ill-judged”. The Ministry said that the actions of Moody’s could possibly create an uncertainty among the investors who have faith in Sri Lanka’s in-store banks and other investments, indicating that Sri Lanka would lose the existing investors due to the impact of the statement made by Moody’s. The statement further said that the Sri Lankan Government has lined up funds to repay its foreign debt liabilities and that includes the international sovereign bonds (ISB) as well. Moody’s Investors Service on Monday announced that it has placed the Government of Sri Lanka’s foreign currency long-term issuer and senior unsecured debt ratings of Caa1 under review for downgrade. In September last year, Moody’s downgraded Sri Lanka’s foreign currency long-term issuer and senior unsecured debt ratings to Caa1 from B2, after placing it under review in April 2020. According to the investors service, the decision to place the ratings under review for downgrade is driven by Moody’s’ assessment that Sri Lanka’s increasingly fragile external liquidity position contributes to raising the risk of default. “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 added. The rating would likely be downgraded in a status quo scenario where the financing of Sri Lanka’s large external debt repayments remained uncertain while foreign exchange reserves adequacy still looked likely to continue deteriorating. According to Moody’s, although the Government has secured some financing, mainly from bilateral sources, its financing options remain narrow with borrowing costs in international markets still prohibitive. In the absence of large and sustained capital inflows through a credible external financing strategy, Moody’s expects Sri Lanka’s foreign exchange reserves to continue declining from the already low levels, further eroding its ability to meet sizable and recurring external debt servicing needs and increasing balance of payment risks. “Extremely weak debt affordability – with interest payments absorbing a very large share of the Government’s very narrow revenue base – compounds the debt repayment challenge,” it further read. The rating review is said to focus on assessing whether the sovereign is able to use a period of time provided by its current foreign exchange reserves and bilateral arrangements to implement measures that widen and increase its financing sources for the medium term, and thereby avoid default for the foreseeable future. Sri Lanka’s foreign currency country ceiling has been lowered to Caa1 from B3, while the local currency country ceiling remains unchanged at B1. The three-notch gap between the local currency ceiling and the sovereign rating balances relatively predictable institutions and government actions against the low and declining foreign exchange reserves adequacy that raises macroeconomic risks as well as the challenging domestic political environment that weighs on policy-making. The three-notch gap between the foreign currency ceiling and local currency ceiling takes into consideration the high level of external indebtedness and the risk of transfer and convertibility restrictions being imposed given low foreign exchange reserves adequacy, with some capital flow management measures already imposed. These ceilings typically act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.


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