Moody’s downgrades Sri Lanka’s ratings to B2 but changes outlook to stable from negative

• Says political crisis exacerbates refinancing risk as financing conditions tighten, reserve adequacy is low
• Volatile domestic political conditions undermine institutional strength
• Slower fiscal consolidation to keep Government debt higher for longer
  
   

Moody’s Investors Service (Moody’s) said yesterday it has downgraded the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings to B2 from B1 and changed the outlook to stable from negative.

The decision to downgrade the rating to B2 is driven by Moody’s view that ongoing tightening in external and domestic financing conditions and low reserve adequacy, exacerbated most recently by a political crisis which seems likely to have a lasting impact on policy even if ostensibly resolved quickly, have heightened refinancing risks beyond levels anticipated when the rating agency affirmed the rating at B1 with a negative outlook in July.

Moody’s projections include a slower pace of fiscal consolidation than assumed in July to reflect disruption to fiscal policy implementation in a period of political turmoil.

The stable outlook denotes balanced credit risks at the B2 rating level. Moody’s expectation is that, despite the current political crisis, any future government will remain broadly focused on implementing important fiscal, monetary and economic reforms that would strengthen the credit profile over the medium term. 

However, Moody’s assessment is that the government’s debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk.

Concurrently, Moody’s lowered the local-currency bond and deposit ceilings to Ba2 from Ba1. The foreign currency bond ceiling was lowered to Ba3 from Ba2 and the foreign currency deposit ceiling was lowered to B3 from B2.

Moody’s rationale for downgrading Sri Lanka’s rating