Two Sri Lanka Government Bonds Downgraded To ‘D’ Following Missed Interest Payments; Sovereign Ratings Affirmed

May, 28, 2022

Overview

  • The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs) on which it has missed interest payments.
  • We do not expect the government to make ISB interest payments within 30 calendar days after their due dates.
  • Following missed interest payments due on May 3 and May 11, we have lowered the ratings on the affected bonds to 'D'.
  • We are affirming our 'SD/SD' foreign currency and 'CCC-/C' local currency ratings on Sri Lanka. The outlook on the local currency ratings is negative.

Rating Action

On May 27, 2022, S&P Global Ratings affirmed its long-term and short-term foreign currency sovereign ratings on Sri Lanka at 'SD/SD.' At the same time, we affirmed our 'CCC-' long-term and 'C' short-term local currency sovereign ratings. The outlook on the local currency ratings remains negative.

In addition, we lowered to 'D' from 'CC' the issue ratings on the following bonds with missed interest payments in May:

  • US$1.5 billion, 6.85% bonds due Nov. 3, 2025.
  • US$1.5 billion, 6.20% bonds due May 11, 2027.

Our transfer and convertibility assessment at 'CC' is unchanged.

Outlook

Our foreign currency rating on Sri Lanka is 'SD' (selective default). We do not assign outlooks to 'SD' ratings because they express a condition and not a forward-looking opinion of default probability.

The negative outlook on the local currency ratings reflects the high risk to commercial debt repayments over the next 12 months in the context of Sri Lanka's economic, external, and fiscal pressures.

Downside scenario

We could lower the local currency ratings if there are indications of nonpayment or restructuring of Sri Lankan rupee-denominated obligations.

Upside scenario

We could revise the outlook to stable or raise the local currency ratings if we perceive that the likelihood of the government's local currency debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding which gives it some time to implement immediate and transformative reforms.

We would raise our long-term foreign currency sovereign credit rating upon completion of the government's bond restructuring. The rating would reflect Sri Lanka's post-restructuring creditworthiness. Our post-restructuring ratings tend to be in the 'CCC' or low 'B' categories, depending on the sovereign's new debt structure and capacity to support that debt.

Rationale

Sri Lanka's external public debt moratorium prevents payment of interest and principal obligations due on the government's ISBs. As such, interest payments due May 3, and May 11, on its 2025 and 2027 ISBs, respectively, would have been affected. Following the missed payments, and given our expectation that payment will not be made within 30 calendar days of the due date, we have lowered the issue ratings on these bonds to 'D' (default).

Overdue coupons now include the following four bonds:

  • US$1.25 billion, 5.75% bonds due 2023
  • US$1.25 billion, 6.75% bonds due 2028
  • US$1.5 billion, 6.85% bonds due 2025
  • US$1.5 billion, 6.20% bonds due 2027

Table 1

Sri Lanka - Selected Indicators

ECONOMIC INDICATORS (%) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Nominal GDP (bil. LC)

11,996

13,328

14,291

15,013

14,973

16,075

16,801

17,823

18,945

20,197

Nominal GDP (bil. $)

82

87

88

84

81

83

61

50

52

55

GDP per capita (000s $)

3.9

4.1

4.1

3.9

3.7

3.7

2.7

2.2

2.3

2.4

Real GDP growth

4.5

3.6

3.3

2.3

(3.6)

3.0

0.5

2.2

2.8

3.0

Real GDP per capita growth

3.3

2.4

2.2

1.6

(4.1)

2.3

(0.2)

1.5

2.1

2.3

Real investment growth

7.8

6.1

1.8

1.0

(9.5)

4.0

1.0

2.8

3.4

4.0

Investment/GDP

27.9

31.6

29.9

26.8

25.2

25.4

26.0

26.0

26.1

26.3

Savings/GDP

25.7

29.0

26.7

24.7

23.9

21.7

21.0

22.5

23.2

23.5

Exports/GDP

21.2

21.8

23.0

23.1

16.6

18.8

19.4

19.4

19.4

19.3

Real exports growth

(0.7)

7.6

0.5

7.2

(9.6)

9.5

4.5

4.0

4.0

4.0

Unemployment rate

4.4

4.2

4.5

4.8

5.5

5.2

4.8

4.5

4.5

4.5

External indicators (%)

Current account balance/GDP

(2.1)

(2.6)

(3.2)

(2.2)

(1.3)

(3.7)

(5.0)

(3.5)

(2.9)

(2.8)

Current account balance/CARs

(7.0)

(8.7)

(10.2)

(7.0)

(5.3)

(14.3)

(15.2)

(9.1)

(7.5)

(7.1)

CARs/GDP

30.1

30.2

31.3

31.4

25.3

26.1

32.7

38.4

39.3

39.5

Trade balance/GDP

(10.8)

(11.0)

(11.8)

(9.5)

(7.4)

(8.7)

(11.5)

(11.8)

(12.0)

(12.2)

Net FDI/GDP

0.8

1.5

1.8

0.8

0.5

0.4

0.5

0.6

0.7

0.8

Net portfolio equity inflow/GDP

0.0

0.4

(0.0)

(0.0)

(0.3)

(0.4)

0.1

0.1

0.1

0.1

Gross external financing needs/CARs plus usable reserves

120.7

128.2

120.5

123.5

119.5

136.2

144.3

159.6

153.1

150.1

Narrow net external debt/CARs

139.5

141.0

137.5

148.1

172.2

174.3

203.4

216.4

209.1

202.2

Narrow net external debt/CAPs

130.3

129.7

124.8

138.4

163.5

152.4

176.5

198.3

194.6

188.8

Net external liabilities/CARs

177.4

178.9

177.0

191.8

231.9

229.8

264.7

281.5

272.0

263.6

Net external liabilities/CAPs

165.8

164.5

160.7

179.3

220.2

201.0

229.7

258.0

253.1

246.1

Short-term external debt by remaining maturity/CARs

38.8

36.5

38.6

45.5

56.6

55.1

48.7

55.8

53.1

51.0

Usable reserves/CAPs (months)

2.3

1.5

2.6

2.6

4.0

2.6

1.4

0.4

0.5

0.6

Usable reserves (mil. $)

3,512

6,469

6,196

7,242

5,264

2,705

643

994

1,161

1,469

Fiscal indicators (general government; %)

Balance/GDP

(5.3)

(5.5)

(5.3)

(9.6)

(11.1)

(11.1)

(11)

(9.0)

(8.7)

(8.4)

Change in net debt/GDP

7.5

6.7

11.2

6.7

13.9

15.8

30.3

10.2

9.2

8.9

Primary balance/GDP

(0.2)

0.0

0.6

(3.6)

(4.6)

(3.8)

(2.1)

1.5

1.9

2.3

Revenue/GDP

15.1

14.7

14.4

13.6

9.5

9.8

9.8

10.3

11.2

11.4

Expenditures/GDP

20.4

20.2

19.7

23.1

20.7

20.9

20.8

19.3

19.9

19.8

Interest/revenues

33.7

37.5

41.4

44.3

68.8

74.9

91.2

101.6

94.9

93.7

Debt/GDP

79.0

77.9

84.2

86.8

101.0

109.8

135.4

137.8

138.9

139.3

Debt/revenues

523.2

528.9

584.1

640.6

1,060.4

1,120.9

1,381.8

1,338.3

1,240.4

1,221.6

Net debt/GDP

78.5

77.3

83.3

86.0

100.2

109.1

134.7

137.1

138.3

138.6

Liquid assets/GDP

0.5

0.6

0.8

0.8

0.8

0.8

0.7

0.7

0.7

0.6

Monetary indicators (%)

CPI growth

4.2

7.3

0.4

6.2

4.6

14.0

25.0

8.0

6.0

6.0

GDP deflator growth

4.8

7.3

3.8

2.7

3.4

4.2

4.0

3.8

3.4

3.5

Exchange rate, year-end (LC/$)

149.80

152.85

182.28

181.63

186.41

203.00

350.00

360.00

365.00

370.00

Banks' claims on resident non-gov't sector growth

21.0

15.8

15.1

5.5

9.0

12.0

12.0

12.0

12.0

12.0

Banks' claims on resident non-gov't sector/GDP

39.5

41.2

44.2

44.4

48.5

50.6

54.3

57.3

60.4

63.4

Foreign currency share of claims by banks on residents

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Foreign currency share of residents' bank deposits

16.5

15.8

16.9

16.5

16.5

16.8

16.5

16.5

16.5

16.5

Real effective exchange rate growth

(2.4)

(0.5)

(4.6)

(5.0)

1.0

(4.3)

N/A

N/A

N/A

N/A

Sources: Department of Census and Statistics, Central Bank of Sri Lanka (economic indicators); Central Bank of Sri Lanka, International Monetary Fund (monetary indicators); Central Bank of Sri Lanka (fiscal and debt indicators); Central Bank of Sri Lanka, International Monetary Fund (external indicators).

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