Sri Lanka downgraded as sovereign default risk rises

Colombo: International ratings agency Moody´s on Thursday downgraded Sri Lanka´s foreign debt rating as the country battles a currency crisis that has led to fears of a sovereign debt default.

Moody´s Investors Service pushed the cash-strapped South Asian nation down a notch to Caa2 from Caa1, saying its position had worsened while it was on a ratings watch since July 19.

Sri Lanka faces shortages of imported essentials such as milk powder, sugar, cooking fuel and cement as banks have run short of dollars to finance imports.

The decision to downgrade was fuelled by the absence of "comprehensive financing" to make looming debt repayments, Moody´s said in a statement.

Sri Lanka had foreign exchange reserves of $2.0 billion at the end of September, compared to $3.6 billion at the end of June and $5.2 billion at the start of this 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 said.

Sri Lanka´s central bank reacted angrily to the downgrade and said all debt obligations would be met. It added that talks were underway to secure bilateral loans to finance key imports.

It highlighted that "Moody´s irrational rating action" comes before the key announcement of the government´s 2022 budget on November 12.

"It also reflects serious governance weaknesses of such agencies, where they systematically overlook the positive developments and expectations in emerging market economies," the bank´s statement said.