Rating agencies downgrade Sri Lanka amid political crisis

COLOMBO (Reuters) - Credit rating agencies Fitch and Standard & Poor’s downgraded Sri Lanka on Tuesday, citing refinancing risks and an uncertain policy outlook, after President Maithripala Sirisena’s sacking of his prime minister in October triggered a political crisis.

Financial district of Colombo is seen as a man runs along a path in front of the China invested Colombo Port City construction site in Colombo, Sri Lanka November 22, 2017. REUTERS/Dinuka Liyanawatte

A bitter row over the ouster of former prime minister Ranil Wickremesinghe in October and the competing influences of China and India have shattered the island’s fragile ruling coalition.

Mahinda Rajapaksa, who replaced Wickremesinghe as prime minister, lacks a parliamentary majority and has been prevented by a court from holding office, delaying the 2019 budget and leading to violent scenes in parliament.

Fitch and S&P cut their ratings to B from B+ following the third major rating agency, Moody’s, which downgraded the island nation on Nov. 20.

Both firms cited risks that Sri Lanka could struggle to refinance its debt. The country has a “heavy” external debt repayment schedule between 2019 and 2022, Fitch said.

“Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate,” Fitch said in a statement.

It said plans to raise funds through bilateral and commercial borrowing, or through the exercise of foreign currency swaps, could be challenging, though it rated its outlook at “stable”, meaning it saw a longer-term recovery for the economy that was badly hit by weather-related disruptions in 2016 and 2017.

S&P said there had been a “significant erosion” in the political situation which could affect Sri Lanka’s ability to refinance its debts.

“It is a mess at the moment,” a finance ministry official told Reuters.

“We have to come out of this dragging political crisis. The borrowing cost is anyway going to rise with this,” said the official, who declined to be identified.

Sirisena told a meeting of his Sri Lanka Freedom Party the crisis would end “in the next seven days”, without elaborating.

The central bank said in a statement that the downgrades by Fitch and S&P were based on “uncorroborated facts on the country’s macroeconomic fundamentals”.

Central Bank Senior Deputy Governor Nandalal Weerasinghe told Reuters, before the S&P downgrade, that Moody’s and Fitch had been “too hasty”.

“Such uncertainties could be very short-lived,” he said.

The rupee LKR=LK has weakened nearly 17 percent this year, while yields on dollar bonds due in 2022 85227SAS5= have risen by more than a percentage point to 8.24 percent since the crisis began.

Editing by Alasdair Pal and Nick Macfie