Moody's cuts Sri Lanka's debt rating; govt says action ill-timed

(Updates with cenbank, govt reaction statement)

By Swati Bhat

MUMBAI, Oct 28 (Reuters) - Rating agency Moody's downgraded Sri Lanka's debt rating to 'Caa2' from 'Caa1' on Thursday saying the country had failed to come up with a comprehensive debt repayment plan and low foreign exchange reserves posed the risk of defaults.

The Sri Lankan central bank, in response, said the government was committed to meeting its debt obligations.

Moody's said external liquidity risks for Sri Lanka's government will remain heightened over the coming years. It said the island nation's downgrade is part of a review initiated by Moody's on July 19.

"The decision to downgrade the ratings is driven by Moody's assessment that the absence of comprehensive financing to meet the government's forthcoming significant maturities, in the context of very low foreign exchange reserves, raises default risks," Moody's said in the release.

"In turn, this assessment reflects governance weaknesses in the ability of the country's institutions to take measures that decisively mitigate significant and urgent risks to the balance of payments," they added.

Sri Lanka's official foreign exchange reserves had dropped to $2.5 billion by the end of September.

The Sri Lankan central bank said Moody's downgrade was ill-timed and unacceptable and renewed Sri Lankan authorities' concerns about the agency's objectivity.

The statement also said the government expressed its strong displeasure with regards to the rating action and said the action comes a few days ahead of the budget for 2022.

"Moody’s assessment has also failed to take into account the latest developments in strengthening the country’s external position through an array of measures, some of which have already yielded intended outcomes," the central bank said.

On Tuesday, Sri Lanka's central bank said it was expecting investments of around $1.1 billion from deals being made in the real estate, ports and energy sectors to help top up the country's flagging forex reserves.

Moody's said a large secure financing envelope remains elusive and the country is relying on piecemeal funding such as swap lines and bilateral loans. However, it said prospects for non-debt generating inflows have improved somewhat since it placed the country's rating under review for downgrade.

On Oct. 1, the central bank laid out a six-month roadmap to deal with the current economic crisis.

Moody's said should foreign exchange inflows disappoint, default risks would rise further.

"Government wishes to re-assure all stakeholders, including the international investor community, that Sri Lanka remains committed to honouring all forthcoming obligations in the period ahead," the central bank statement said.
Reporting by Swati Bhat in Mumbai and Shubham Kalia in Bengaluru; Editing by Ramakrishnan M, Christina Fincher and Susan Fenton

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