Safer to Lend to Ethiopia than SL!

On Friday (17), Fitch Rating, an international credit rating agency, dual headquartered in London and New York, downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC,’ from ‘CCC’. Of the 124 countries ‘credit rated’ by Fitch, Sri Lanka stands right at the bottom at the 121st position and is the only economy with the unenviable credit rating of ‘CC’. A ‘CC’ rating stands ninth out of a total of 11 Fitch ratings in alphabetically descending order which means that the lower one goes in Fitch’s ratings lists, the higher the chances of debt default.

Sub-Saharan countries like Ethiopia, Congo, Angola, Gambia and Mozambique have a higher credit rating of ‘CCC’, higher than Sri Lanka’s ‘CC’, which indicates that it’s safer to lend to a country like Ethiopia than Sri Lanka if one wants to recover one’s lending! Meanwhile, a credit rating of ‘CC’ is just two notches below Fitch’s lowest credit rating which is ‘D’. ‘CC’ credit rating is defined as, “debt default is a strong probability.”

In related developments, the three countries which have a rating below Sri Lanka in alphabetical order are Lebanon, a Middle Eastern economy, Suriname, a South American economy and Zambia, a Sub Saharan economy.

Those three economies carry a Fitch rating of ‘RD’ which means ‘restricted default’ or “debt issuer has defaulted on a payment.”  ‘RD’ is Fitch’s second lowest credit rating while its lowest, as aforesaid, is a  ‘D’ grade credit rating, which means “defaulted”, not much, or hardly any different to an ‘RD’ credit rating. ‘CC’ is Fitch’s third lowest credit rating.

Prior to Sri Lanka’s current rating downgrade of ‘CC,’ it had a one notch higher ‘CCC’ credit rating. The definition of a ‘CCC’ grade credit rating is, “a real possibility of default.”

Nonetheless, there are a total of eight countries with a ‘CCC’ credit rating, a rating higher than that of Sri Lanka’s. They comprise the aforesaid five Sub Saharan economies, namely Angola, Congo, Ethiopia, Gambia and Mozambique, the former Marxist South East Asian economy of Laos, the former  Soviet Union satellite State of Turkmenistan located in  Central Asia and  the South American economy of Argentina, respectively.  

Meanwhile, four other South Asian economies other than Sri Lanka are captured in Fitch’s ratings basket. They are India, Bangladesh, Pakistan and Maldives. India has a ‘BBB-‘credit rating, four notches higher than that of Sri Lanka’s ‘CC’ credit rating.

Bangladesh has a ‘BB-‘credit rating, three notches higher than Sri Lanka and both Pakistan and the Maldives have a common credit rating of ‘B-‘ each, which is two notches higher than that of Sri Lanka’s. The remaining three South Asian economies, Nepal, Bhutan and Afghanistan, are not captured by Fitch.

When the present Government came to power after the 17 November 2019 Presidential Poll, Sri Lanka had a higher credit rating of ‘B Stable.’ But with tax reductions given soon after this Government came into power and its deleterious impact on Government revenue, Fitch downgraded the country’s credit rating to  ‘B Negative’ on 18 December 2019. 

COVID-19 added further fuel to the fire, with Sri Lanka being further downgraded by Fitch to ‘B- (Negative)’ on 24 April 2020 and compounded by the country’s heavy foreign debt servicing commitments, to  ‘CCC’ on 27 November 2020,  and now, the latest downgrade to ‘CC’ on Friday.

The beginnings of Sri Lanka’s high foreign debt accumulation underlined by the growth in short term, costlier foreign debt began post 2005. 

Sri Lanka’s foreign commercial debt, as a percentage of total debt, which was a mere four per cent as at end of 2005, rose to over 50 per cent seven years later by 2012, making Sri Lanka’s then IMF Resident Representative Dr Koshy Mathai to warn of the deleterious implications of accumulating more foreign debt of commercial origin. But his warning fell on deaf ears.

For example, what’s the point in borrowing from external commercial sources to build costly infrastructure works where there is little or no return either in terms of US dollars or in rupees, to make sense of such investments?

Nonetheless, as Fitch, in its rating statement of last Friday, titled, “Factors that could, individually or collectively lead to positive rating action/upgrade,” said, “1. External Finances: Improved external liquidity supported by higher non-debt inflows or lower external sovereign refinancing risk from an enhanced liability profile that allows for smooth servicing of liabilities, 2. Public Finances: Implementation of a credible medium-term fiscal consolidation strategy that supports a sustained decline in the general Government debt/GDP ratio, increasing financing options and reducing the probability of default and 3.Structural: Improved policy coherence and credibility leading to more sustainable public and external finances and a reduction in the risk of debt distress.”

A strong political will to change Sri Lanka’s economic course at the expense of short term political inexpediency, is the crying need of the hour.

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