UPDATE 1-Fitch downgrades Sri Lanka as default fears loom

(Adds Sri Lanka comment)

LONDON, Nov 27 (Reuters) – Ratings agency Fitch downgraded Sri Lanka’s sovereign debt to “CCC” on Friday, warning that the country was at increasing risk of missing debt payments due to the coronavirus pandemic.

Sri Lanka relies on tourism and garment exports for foreign exchange reserves. It’s been hit hard by the pandemic, which has undercut consumer demand and curtailed almost all global travel this year.

The CCC rating means Fitch considers default to be “a real possibility”.

“We think there are now increasing risks to Sri Lanka’s ability to meet its external debt repayments,” Fitch analysts said in a note.

Sri Lanka has around $4 billion of debt repayments due annually until 2025. Its foreign exchange reserves stand at just under $6 billion.

Earlier this month, Finance Minister Mahinda Rajapaksa presented an ambitious budget that aimed to more than halve the fiscal deficit over the medium term. But Fitch said it expected the country’s fiscal position to worsen, not improve, over the next few years.

It expects the government’s ratio of debt to gross domestic product to increase to about 100% in 2020 from 86.8% in 2019 and to rise to around 116% in 2024. Sri Lanka’s own targets see a reduction in debt-to-GDP to 75.5% in 2025, from an estimated 95.1% in 2020.

In a statement, Sri Lanka’s finance ministry called the downgrade “baseless”, saying it had acted to contain the economic impact of the pandemic faster than many other emerging countries.

“We do not accept this downgrade as it fails to recognize the robust policy framework of the new government for addressing the legacy issues, including the concerns raised by Fitch,” the statement said.

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