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Business News/ Economy / Anticipating a ‘series of defaults’ Moody’s cut Sri Lanka’s credit rating
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Anticipating a ‘series of defaults’ Moody’s cut Sri Lanka’s credit rating

Moody's says its assessment reflects governance weaknesses in the ability of the country's institutions to take measures that decisively address the very low adequacy of foreign exchange reserves

The tourism recovery had been hampered by the emergence of the omicron variant of the coronavirus when Sri Lanka's international borders reopened, while lengthy power cuts and food shortages amid import restrictions to preserve foreign exchange, coupled with street protests, are likely to deter tourists, the report said. (Bloomberg)Premium
The tourism recovery had been hampered by the emergence of the omicron variant of the coronavirus when Sri Lanka's international borders reopened, while lengthy power cuts and food shortages amid import restrictions to preserve foreign exchange, coupled with street protests, are likely to deter tourists, the report said. (Bloomberg)

Triggered by Sri Lanka’s decision to default on $51 billion of foreign debt last week, Moody’s on Monday downgraded the island's credit rating, stating that debt servicing suspension will lead to a “series of defaults".

Debt servicing suspension is usually seen as a last-ditch effort to conserve cash amid crises. Sri Lanka has suspended debt servicing in order to procure essentials such as food, fuel and medicines as it battles its worst financial crisis since 1948. 

Moody's downgraded the government of Sri Lanka's “long-term foreign-currency issuer and senior unsecured debt ratings to Ca from Caa2", adding that its assessment reflects governance weaknesses in the ability of the country's institutions to take measures that decisively address the very low adequacy of foreign exchange reserves. 

 “The announcement of the interim policy to suspend the servicing of external public debt after 5 pm Colombo time on 12 April 2022 will lead to a series of defaults on Sri Lanka's international bonds with coupon payments due as soon as today," Moody’s said. 

Sri Lanka's foreign exchange reserves adequacy has continued to decline despite continued financing support from bilateral development partners including India and China, the rating agency said.

Foreign exchange reserves excluding gold and special drawing rights stood at $1.7 billion at the end of March 2022, sufficient to cover only around 1 month of imports.

Until a large external financing envelope becomes available, Moody's expects foreign exchange inflows into Sri Lanka to remain subdued. 

The tourism recovery had been hampered by the emergence of the omicron variant of the coronavirus when Sri Lanka's international borders reopened, while lengthy power cuts and food shortages amid import restrictions to preserve foreign exchange, coupled with street protests, are likely to deter tourists, the report said.

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Published: 18 Apr 2022, 09:29 PM IST
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