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Monday December 11th, 2023

Moody’s downgrades Sri Lanka sovereign rating to Caa2

ECONOMYNEXT – Moody’s Investors Service has downgraded Sri Lanka’s sovereign rating to Caa2 from Caa1, taking the country’s credit deeper into speculative grade as foreign reserves continued to fall amid money printing and crippled forex markets.

“A large financing envelope that Moody’s considers to be secure remains elusive and the sovereign continues to rely on piecemeal funding such as swap lines and bilateral loans, although prospects for non-debt generating inflows have improved somewhat since Moody’s placed Sri Lanka’s rating under review for downgrade,” the rating agency said.

“Persistently wide fiscal deficits due to the government’s very narrow revenue base compound this challenge by keeping gross borrowing needs high and removing fiscal flexibility.

“The decision to downgrade the ratings is driven by Moody’s assessment that the absence of comprehensive financing to meet the government’s forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks.”

Liquidity injections and dysfuctional forex markets due to loss of confidence in the domestic currency, had made it difficult to transfer wealth out of the country through the credit system not just for debt but also for current transactions. As a result the country is also seeking credit lines for imports.

The full statement is reproduced below:

Rating Action: Moody’s downgrades Sri Lanka’s rating to Caa2; outlook stable

28 Oct 2021

Singapore, October 28, 2021 — Moody’s Investors Service (“Moody’s”) has today downgraded the Government of Sri Lanka’s long-term foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa1 under review for downgrade.

The outlook is stable. This concludes the review for downgrade initiated on 19 July

The decision to downgrade the ratings is driven by Moody’s assessment that the absence of comprehensive
financing to meet the government’s forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks.

In turn, 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.

External liquidity risks remain heightened.

A large financing envelope that Moody’s considers to be secure remains elusive and the sovereign continues to rely on piecemeal funding such as swap lines and bilateral loans, although prospects for non-debt generating inflows have improved somewhat since Moody’s placed Sri Lanka’s rating under review for downgrade. Persistently wide fiscal deficits due to the government’s very narrow revenue base compound this challenge by keeping gross borrowing needs high and removing fiscal flexibility.

The stable outlook reflects Moody’s view that the pressures that Sri Lanka’s government faces are consistent with a Caa2 rating level. Downside risks to foreign exchange reserves adequacy remain without comprehensive financing and narrow funding options. Should foreign exchange inflows disappoint, default risk would rise further.

However, non-debt generating inflows particularly from tourism and foreign direct investment (FDI) may accelerate beyond Moody’s current expectations, which, coupled with the track record of the authorities to put together continued, albeit partial, financing, may support the government’s commitment and ability to repay its debt for some time.

Sri Lanka’s local and foreign currency country ceilings have been lowered to B2 and Caa2 from B1 and Caa1, respectively.

The three-notch gap between the local currency ceiling and the sovereign rating balances relatively predictable institutions and government actions against the very low foreign exchange reserves
adequacy that raises macroeconomic risks, as well as the challenging domestic political environment that weighs on policymaking.

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.


Moody’s initiated a review for downgrade on Sri Lanka’s ratings to assess the prospects for significant external financing to materially and durably lower the risk of default stemming from the country’s very low foreign exchange reserves adequacy. Although the potential for non-debt generating inflows has increased somewhat in recent months, the improvement in tourism and FDI prospects is highly tentative.

At the same time, a large external financing envelope that Moody’s considers to be secure remains highly unlikely. In turn, external liquidity risks for Sri Lanka’s government will remain heightened over the coming years, raising the risk of default.

Sri Lanka’s foreign exchange reserves adequacy has fallen further since Moody’s initiated the review. Foreign exchange reserves (excluding gold and SDRs) amounted to $2 billion as of the end of September, compared to $3.6 billion as of the end of June and $5.2 billion at the beginning of the year. The reserves are sufficient to cover only around 1.3 months of imports and are significantly below the government’s external repayments of around $4-5 billion annually until at least 2025.

Moody’s baseline scenario continues to assume that the authorities will manage to obtain some foreign
exchange resources and financing through a combination of project-related multilateral financing, official sector bilateral assistance including central bank swaps, commercial bank loans, the divestment of state-owned assets, and measures by the Central Bank of Sri Lanka (CBSL) to capture some export receipts and remittances.

However, the amounts are generally modest, the arrangements piecemeal, and of relatively short
maturity besides multilateral funding for project loans.

Meanwhile, ongoing efforts under the authorities’ six-month roadmap to promote macroeconomic and financial stability will likely boost FDI somewhat, and the reopening of international borders without quarantine requirements for fully vaccinated travellers will support the gradual recovery of tourism-related receipts.

However, while Sri Lanka’s potential suggests that sizeable foreign exchange receipts could be generated, this potential has remained only partially realised for many years and realising it now is subject to the confidence and risk appetite of investors and travellers, both of which are highly uncertain.

Therefore, although reserves are likely to rise slightly over the next few months on the back of some of these inflows materialising, Moody’s expects them to remain insufficient to provide a buffer to meet the government’s external repayment needs.

Meanwhile, Moody’s assumes that Sri Lanka will not participate in a financing programme with the International Monetary Fund or other multilateral development partners for the foreseeable future, while international bond markets remain prohibitive as a source of external financing.

Heightened liquidity risks are compounded by Moody’s expectation that the government’s fiscal deficit will remain wide over the next few years, which will keep borrowing needs high and remove fiscal flexibility.

Although government revenue is likely to rebound alongside the economy — Moody’s projects real GDP will grow by an average of around 5% in 2022-23 — it will stay low in the absence of revenue reforms.

Moody’s estimates that revenue will remain around 10% of GDP over the next few years. At the same time, interest payments will continue to absorb around 60-70% of revenue, leaving the government with politically challenging tradeoffs in rationalising across social spending and development expenditure.

As such, Moody’s sees limited prospects for meaningful expenditure cuts, implying still wide fiscal deficits of 8.0-8.5% of GDP in 2022-23, compared to an average of 5.7% over 2016-19.

The wide deficits correspond to a gross borrowing requirement of around 25-27% of GDP per year over 2022- 23.

While Moody’s assumes that the government can continue to access local currency financing given the
size of the domestic savings pool and excess domestic liquidity in the banking system, this comes at a cost on the overall interest bill and does not address foreign-currency debt repayments.


The stable outlook reflects Moody’s view that the pressures that Sri Lanka’s government faces are consistent with a Caa2 rating level.

The risk that foreign exchange reserves will continue to fall and increase the likelihood of default remains material, since the foreign exchange inflows available so far are generally piecemeal in the case of swaps and bilateral loans, and uncertain in the case of non-debt generating inflows.

That said, the authorities have a track record of securing some financing, even if only partial and at some cost, to support the government’s commitment and ability to repay its external debt.

Moreover, notwithstanding the significant uncertainty as discussed above, foreign direct investment and in particular tourism-related receipts have the potential to accelerate in an upside scenario and supplement the authorities’ ability to keep default at bay.

For tourism, the relatively high vaccination rate compared to emerging market and regional peers may support a quicker recovery in arrivals compared to Moody’s baseline assumptions. For foreign direct investment, the country’s status as a growing regional hub for transport and logistics as well as financial and technological services — helped by free trade agreements with large neighbouring countries such as India and Pakistan — may support long-term inflows, although as mentioned
above this potential has remained only partially realised for some time.


Sri Lanka’s ESG Credit Impact Score is highly negative (CIS-4), reflecting its highly negative exposure to environmental and social risks. Ongoing challenges to institutional and policy effectiveness and a very high debt burden constrain the government’s capacity to address ESG risks.

The exposure to environment risk is highly negative (E-4 issuer profile score). Variations in the seasonal monsoon can have marked effects on rural household incomes and real GDP growth: while the agricultural sector comprises only around 8% of the total economy, it employs almost 30% of Sri Lanka’s total labour force.

Natural disasters including droughts, flash floods and tropical cyclones that the country is exposed to also contribute to higher food inflation and import demand. Moreover, ongoing development projects to improve urban connectivity have increased the rate of deforestation, although the country continues to engage development partners to preserve its natural capital, such as its mangroves.

The exposure to social risk is highly negative (S-4 issuer profile score). Balanced against Sri Lanka’s relatively good access to basic education, which has continued to improve throughout the country in the post-civil war period, are weaknesses in the provision of some basic services in more remote and rural areas, such as water, sanitation and housing. As the country’s population continues to grow, the government will face greaterconstraints in delivering high-quality social services and developing critical infrastructure amid ongoing fiscal pressures.

The influence of governance is highly negative (G-4 issuer profile score). While international surveys point to stronger governance in Sri Lanka relative to rating peers, including in judicial independence and control of corruption, institutional challenges are significant, particularly in the pace and effectiveness of reforms.

Domestic political developments also tend to weigh on fiscal and economic policymaking.

GDP per capita (PPP basis, US$): 13,223 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -3.6% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.6% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -11.1% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.3% (2020 Actual) (also known as External Balance)

External debt/GDP: 61.0% (2020 Actual)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 25 October 2021, a rating committee was called to discuss the rating of the Sri Lanka, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed.

The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The
issuer’s susceptibility to event risks has not materially changed.


The Caa2 rating takes into account a non-negligible probability of default. The rating would likely be upgraded if the risk of default were to diminish materially and durably.

This could stem from the government delivering a credible and secure medium-term external financing strategy that maintained a manageable cost of debt, and a faster and more sustained buildup in non-debt creating foreign exchange inflows.

Additionally, implementation of fiscal consolidation measures, particularly greater revenue mobilisation, that pointed to a material narrowing of fiscal deficits in the next few years and contributed to lower annual borrowing needs, would also be credit positive.

The rating would likely be downgraded if the prospects for foreign exchange inflows were to significantly weaken, resulting in a further deterioration in foreign exchange reserves adequacy and leading to a higher probability of default or greater risk of material losses should default occur than consistent with a Caa2 rating.

Additionally, a further rise in the government’s debt burden and weakening in debt affordability from already very weak levels that constrained its ability to finance itself domestically would also likely result in a downgrade of the rating.

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Sri Lanka’s Singer Finance rating cut to BBB (lka), outlook stable: Fitch

ECONOMYNEXT – Fitch Ratings has downgraded the national long-term rating of Sri Lanka’s Singer Finance (Lanka) Plc to ‘BBB (lka)’ from ‘BBB+(lka)’.

This rating is a support driven rating and therefore this downgrade follows similar rating action on SFL’s parent, the company said in a statement.

Its senior listed rated unsecured debentures of Rs 5 million issued on May 19, 2020 were also revised down from BBB+ ro BBB; and subordinated listed rated unsecured debentures of Rs 2,000 million issued in June 25, 2021 were revised down from BBB- to BB+.

The full statement is reproduced below:

Fitch Downgrades Singer Finance to ‘BBB(lka)’; Outlook Stable

Fitch Ratings – Colombo/Mumbai – 07 Dec 2023: Fitch Ratings has downgraded Singer Finance (Lanka) PLC’s (SFL) National Long-Term Rating to ‘BBB(lka)’ from ‘BBB+(lka)’. The Outlook is Stable. Fitch has also downgraded SFL’s outstanding senior unsecured debt to ‘BBB(lka)’ from ‘BBB+(lka)’, and the outstanding subordinated unsecured debentures to ‘BB+(lka)’ from ‘BBB-(lka)’.


Parent’s Weakening Ability to Support: The downgrade follows similar rating action on SFL’s parent, consumer-durable retailer, Singer (Sri Lanka) PLC (A(lka)/Stable), on 29 November 2023. SFL’s rating is based on our expectation of support from Singer, taking into account Singer’s 80% shareholding in SFL, the common brand name and a record of equity injections into SFL. As such, the downgrade reflects Singer’s weakening ability to provide support.

Moderate Synergies: We believe SFL has limited synergies with Singer, as evident from SFL’s small share of lending within the group’s ecosystem. We also believe support from the parent could be constrained by SFL’s significant size relative to Singer, as its assets represented 41% of group assets at end-September 2023. SFL’s operational integration with the group is also low, although the parent has increased its focus on the subsidiary’s strategic long-term decision-making over the past few years and has meaningful representation on SFL’s board.

Weak Standalone Profile: SFL’s intrinsic financial position is weaker than its support-driven rating. It has a small domestic vehicle-focused lending franchise and a high-risk appetite stemming from its exposure to customer segments that are more susceptible to difficult operating conditions.

Less Severe Economic Risk: We expect downside economic risk to moderate after Sri Lanka completed the local-currency portion of its domestic debt optimisation, which addressed one element of risk to financial system funding and liquidity. We expect the operating environment to remain challenging in light of strained household finances and fragile investor confidence, but conditions should stabilise with a gradual economic recovery amid easing inflation and interest rates.

Vehicle Loans Remain Dominant: SFL’s business model is dominated by vehicle financing, which accounted for 69% of its lending portfolio as at end-June 2023. Gold loans have been growing at a faster rate in the last few quarters, reaching 28% of SFL’s portfolio, amid lower demand for vehicle financing. However, we do not expect a major change in SFL’s vehicle-focused business mix in the medium term, given its more established franchise in this segment.

Weak Asset Quality: SFL’s reported stage 3 assets ratio rose to 11.9% in the financial year ending March 2023 (FY23), from 6.6% in FY22, on weaker collections in its core vehicle loans segment as well as implementation of a stricter stage 3 recognition rule. We expect asset quality to remain stressed in the medium term, due to the weak economic environment. Nonetheless, loan collections could increase as borrower repayment capability improves, provided the economy gradually stabilises with declining inflation and interest rates.

Profitability to Recover, Leverage Rising: We expect SFL’s net interest margin to gradually recover in the medium term amid a declining interest-rate environment. This, along with a potential pick-up in loan growth, should support earnings and profitability, but a strong loan expansion in the medium term could pressure leverage.

Pre-tax profit/average total assets declined to 3.1% in FY23, from 4.5% in FY22, due to a sharply narrower net interest margin of 9.4%, against 12.7% in FY22. This followed a surge in borrowing costs due to rising interest rates. SFL’s debt/tangible equity reached 5.4x by end-September 2023, from 5.1x at FYE22.

Improved Funding and Liquidity: SFL’s share of unsecured deposits/total debt swelled to 80% by end September 2023, from 52% at FYE22, supported by a greater focus on raising deposits. SFL’s increased cash and cash equivalents from deposit raising and reduced lending mitigated near-term liquidity pressure.

Liquid assets/total assets rose to around 27% by end-September 2023, from 8% at FYE22, as SFL boosted its investments in liquid assets amid fewer lending opportunities.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

SFL’s rating is sensitive to changes in Singer’s credit profile, as reflected in Singer’s National Long-Term Rating.

Singer’s weaker ability to provide support to SFL, as signaled through a further downgrade of its rating, SFL’s increased size relative to Singer that makes extraordinary support more onerous or delay in providing liquidity support relative to SFL’s needs due to economy-wide issues could also lead to negative rating action on SFL.

The ratings may also be downgraded if we perceive a weakening in Singer’s propensity to support its finance subsidiaries due to weakening links. That said, SFL’s standalone credit profile could provide a floor to the rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A significant positive turnaround in Singer’s financial prospects or increase in SFL’s strategic importance to Singer through a greater role within the group could lead to narrower notching from Singer’s profile. A large improvement in SFL’s intrinsic credit profile could result in its ratings been derived from its standalone profile.



The rating on SFL’s senior unsecured debt is in line with the National Long-Term Rating, as the debt constitutes the unsubordinated obligations of the company.


SFL’s Sri Lankan rupee-denominated subordinated debentures are rated two notches below its National Long-Term Rating to reflect their subordination to senior unsecured obligations. Fitch’s baseline notching of two notches for loss severity reflects our expectation of poor recovery. There is no additional notching for non-performance risk.

SFL’s senior unsecured debt and subordinated unsecured debt ratings will move in tandem with the National Long-Term Rating.

The principal sources of information used in the analysis are described in the Applicable Criteria.

SFL’s rating is driven by Singer’s National Long-Term Rating.

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Sri Lanka’s ousted utilities regulatory chief convinced he’ll be president

ECONOMYNEXT — Sri Lanka’s former public utilities regulatory chief Janaka Ratnayake, who was removed in May following a parliamentary vote, has confirmed that he intends to run for president.

Speaking to reporters on Sunday December 10 in the wake of an hours-long island-wide power outage the previous evening, Ratanayake said he will be the definite winner at a future presidential poll.

“I announced [my intention to run] officially on December 07, my birthday. I’m definitely coming as a presidential candidate. That’s not all, I’m the definite president at a future presidential election,” he said.

Ratnayake, in his first media appearance in months, was responding to questions about newspaper advertisements published on December 07 announcing his future candidacy.

Sri Lanka’s parliament on May 24 opted to remove the former chairman of the Public Utilities Commission of Sri Lanka (PUCSL), with 123 members voting in favour. This marked the first time a head of an independent government commission was sacked by Sri Lanka’s parliament.

Power & Energy Minister Kanchana Wijesekara, who had been at loggerheads with the regulatory chief, said at the time that the official had acted obstinately without the concurrence of fellow commission members.

The minister levelled five charges against Ratnayake, the first twoof  which were based on a February 10 verdict by the Court of Appeal rejecting an application filed by the offiical against an electricity tariff hike. Opposition legislators slammed the decision saying it undermined independent commissions.

Ratnayake’s presidential ambitions have been known for some time. A day before parliament voted to remove him, he told reporters: “If I can change the country, I will definitely join politics, because my intention is to serve the people and what is right.”

Ratnayake had blocked delayed a tariff hike in early 2023, resulting in losses to the state-run Ceylon Electricity Board (CEB), Minister Wijesekara claimed at the time. The PUCSL had als onot enabled tariff hikes for nine years, requiring its governing law to be changed, Wijesekera said.

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Sri Lanka wants university research to lead to commercially viable products

ECONOMYNEXT – Sri Lanka’s ministry of industries wants to ensure commercially-ready products and services are produced by university research, by facilitating partnerships with factories and entrepreneurs.

After a currency crisis, Sri Lanka’s government is in a drive to boost its trade balance by increasing exports.

“Our export basket hasn’t changed recently, partly because our small and medium entrepreneurs don’t have sufficient research and development facilities (like the multinationals) to innovate their products for the export market,” Additional Secretary of the Ministry of Industries, Chaminda Pathiraja said.

“At the same time, state universities and research institutes produce a large amount of research findings yearly, which end up sitting in those institutions; they don’t reach the industry,” Pathiraja said at a press briefing to announce a program on commercialization of new products and research, to be held tomorrow at the Waters Edge.

The networking forum will bring innovators and manufacturers together to focus on the commercialization of research for the value added tea, coir, spice, dairy products, gem and jewellery and packaging products industries.

“We want to encourage collaboration, through programs like our University Business League etc, so that the research output can be commercialized, and what is produced by our factories can increase in quantity and quality. We must focus on the export market.”

The objective of this program, he said, was to reduce the gap in acquiring innovators’ ideas and skills by the investors, and ultimately boost the manufacturing sector’s efficiency in alignment with the export market.

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