Low forex reserves, high debt threaten Sri Lankaâ€™s loan repayments: Moodyâ€™s
ECONOMYNEXT – Sri Lanka is one of four Asian countries particularly vulnerable to shifts in global borrowing conditions, with low foreign exchange reserves and large debt requirements threatening its ability to refinance loans, Moody’s Investors Service said.
“For Sri Lanka, further political tension could also spark capital outflows and raise the country’s risk premia, exacerbating tight financing conditions,” the rating agency said.
Moody’s downgraded Sri Lanka’s rating in November 2018 after a political crisis worsened external vulnerability and government liquidity risk, and raised uncertainty over fiscal and macroeconomic reforms.
It said in its latest outlook for Asia Pacific sovereigns that foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening their ability to refinance debt and fund deficits affordably.
Foreign exchange reserves have declined owing to persistent current account deficits, which have widened over the past two years, the report said.
“Our external vulnerability indicator (EVI)5 reading for both countries exceeds 160% for 2019, indicating that total public and private external debt due over the next year is larger than foreign exchange reserves.”
Moody’s said tighter global funding conditions resulting in higher credit risk premia and/or domestic interest rates would quickly transmit to government finances in both countries – where debt affordability is already weak – owing to large gross borrowing requirements.
It said Maldives, Mongolia, Pakistan and Sri Lanka are particularly vulnerable to shifts in external financing conditions with Sri Lanka’s gross borrowing requirement as a percentage of GDP the second highest after Pakistan.
Fiscal challenges have increased most notably in Malaysia and Sri Lanka, Moody’s said.
"In Sri Lanka, we expect continued political tension and disruption to fiscal and economic policymaking to slow budgetary consolidation efforts and keep the government debt burden higher for longer."