Sri Lanka Downgraded as It Eyes Loan From China to Service Debt
(Bloomberg) -- S&P Global Ratings cut Sri Lanka’s credit rating deeper into junk, hours after the nation’s central bank governor said it sees the possibility of fresh lending by China to help meet its debt servicing obligations.
The company lowered the long-term sovereign credit rating to CCC from CCC+ with a negative outlook, and affirmed the C short-term rating. Sri Lanka has a $500 million bond due Jan. 18 -- which it has said it has allocated foreign currency for -- and another $1 billion of notes maturing in July.
“Sri Lanka’s external financial position will deteriorate further over the coming quarters,” S&P said in a statement Wednesday. “This would affect Sri Lanka’s ability to service its debt over the next 12 months.”
The move follows a statement from central bank Governor Ajith Nivard Cabraal, who said “there maybe a possibility of a new loan from China to cushion our debt repayments. We have an understanding that they would assist us.”
S&P said it could further downgrade Sri Lanka if the country’s fundraising activities fall short of government targets or its foreign exchange reserves erode beyond expectations. Sri Lanka had $3.1 billion of foreign-currency reserves in December after drawing down a $1.5 billion swap line with China.
China’s loans to Sri Lanka have often been a contentious topic over the past decade, with concerns that the country could struggle to repay and be used by Beijing to counter India and U.S. influence in the Indo-Pacific region. Sri Lanka had about $3.5 billion in debt from China by end-2020, excluding loans to state enterprises, according to central bank data.
Chinese Foreign Ministry spokesman Wang Wenbin said he was not aware of the situation. “China has been providing assistance to the social and economic development of Sri Lanka within the best of its capacity and will continue to do so in the future,” he said in a scheduled media briefing.
The possibility of a new loan comes after President Gotabaya Rajapaksa asked Chinese Foreign Minister Wang Yi last weekend for Beijing to consider restructuring debt repayments. Delays in securing fresh funds -- key to meeting loan obligations -- have been cited by Fitch Ratings and Moody’s Investors Service as reasons for cutting Sri Lanka’s credit score deeper into junk and raising the specter of default.
Cabraal told Bloomberg News earlier this week that Sri Lanka won’t need to roll over $1.5 billion of sovereign debt due this year as he’s certain efforts to secure funds will materialize. He said on Wednesday that a $1 billion credit facility for imports from India was “at reasonable level of advanced negotiations” and will help spur bilateral trade and ease debt servicing too.
Cabraal expects the local economy to expand by 5.5% this year and said that GDP likely grew around 4.5% to 5% in 2021 despite challenges of the pandemic. The intention is to keep the economy growing while reducing exposure to sovereign bonds and restructuring debt without inflicting pain on investors, he added.
The government has been reaching out for bilateral funding as Sri Lanka’s finances have nosedived since the pandemic, with its key foreign exchange earners of tourism and remittances hit. The country maintains a deep-seated reluctance to seek help from the International Monetary Fund as that would involve austerity measures.
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