Fitch’s downgrade was due to government failure to implement correct financial policies, says UNP – The Island

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The UNP said Sri Lanka’s downgrade to CC by Fitch Rating indicated an increased likelihood of a default event in the coming months given the deteriorating external liquidity position of the country and the decline in foreign exchange reserves.

Addressing a press conference at party headquarters in Sirikotha, UNP chairman and former minister Wajira Abeywardena said he could not accept the excuse given by the government that the downgrading was a consequence of the COVID-19 pandemic.

“During the same period, with the exception of a few countries like Sri Lanka, every other country in the world has increased their dollar reserves. Hence, this is not an excuse that could be accepted as the real cause of this problem. It is nothing more than a failure to implement correct financial policies, ”he said.

The UNP chairman said Fitch demoted Sri Lanka to “CC” from “CCC”. They did so, saying there was an increased likelihood of default as cash injections made to sterilize interventions and apply a 6.0% policy rate continue to drain reserves and create currency shortages. This downgrade signals the likelihood of an event of default in the coming months given the worsening external liquidity position of Sri Lanka, underscored by a decline in foreign exchange reserves in the face of high external debt payments and limited funding inflows. “We are facing the danger of the collapse of the economy. We are seeing the signs of economic collapse. These signs are preventing investors from coming to this country, ”said Abeywardena.

He said Fitch maintains issuer default ratings from AAA to D. AAA ratings denote the lowest expectation of default risk. They are only allocated in the event of an exceptionally strong capacity to pay financial commitments. It is very unlikely that this ability will be adversely affected by foreseeable events. AA ratings correspond to very high credit quality, indicating expectations of very low default risk. They indicate a very strong capacity to pay financial commitments. This capacity is not significantly vulnerable to foreseeable events. “A” ratings indicate expectations of low default risk. The capacity to pay financial commitments is considered strong. However, this capacity may be more vulnerable to adverse business or economic conditions than is the case for higher ratings. BBB ratings indicate that default risk expectations are currently low. The ability to pay financial commitments is considered adequate, but adverse business or economic conditions are more likely to affect this ability. “BB” ratings indicate high vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, there is commercial or financial flexibility that supports the service of financial commitments. “B” ratings indicate that a significant risk of default is present, but a limited margin of safety remains. Financial commitments are currently being met; however, the capacity for ongoing payments is vulnerable to the deteriorating business and economic environment. The CCC ratings where Sri Lanka was located until last week denote substantial credit risk with a very low margin of safety. Default is a real possibility at this point. The CC is Sri Lanka’s current rating status with very high levels of credit risk and some kind of default seems likely. Below we have three more evaluations. The next worst could be “C” ratings indicating a nearby fault. This is the stage where a process of default or similar to a default has started, or the issuer has stalled, or for a closed finance vehicle, the ability to pay is irrevocably compromised. Next are RD ratings which indicate an issuer that, in Fitch’s opinion, has experienced an untreated default or a distressed debt swap on a bond, loan, or other significant financial obligation, but has failed. has not filed for bankruptcy, administration, receivership, liquidation or other liquidation proceedings and has not otherwise ceased its activities. At the bottom, D-ratings indicate an issuer who, in Fitch’s opinion, has instituted bankruptcy, administration, receivership, liquidation or other formal liquidation proceedings or has otherwise ceased its activities.

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