By Alasdair Pal and Marc Jones
LONDON (Reuters) - Fitch downgraded Sri Lanka's sovereign credit rating to "CCC" on Friday, warning the country's debt levels were set to soar past 100% of GDP and that it was increasingly at risk of default.
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", according to its ratings framework, as it added to Sri Lanka's string of downgrades this year.
"We think there are now increasing risks to Sri Lanka's ability to meet its external debt repayments," the firm's analysts said in a note.
In a statement, Sri Lanka's finance ministry called the downgrade "baseless" and "based on uncorroborated facts" saying the government 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 recognise the robust policy framework of the new government for addressing the legacy issues," the statement said.
Sri Lanka has around $4 billion of debt repayments due annually until 2025. Its foreign exchange reserves stand at just under $6 billion leaving it little room to spare.
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.
BIG GAME TALK
Rival ratings agency Moody's downgraded Sri Lanka to an equivalent level in September, noting the country's debt repayments in the next few years.
Sri Lanka's bond prices fell by more than 40% in the first half of the year, though they have since recovered some ground.
Kevin Daly, a portfolio manager at Aberdeen Standard Investments, said the rating agency downgrades and bond market turbulence represented a stark difference to the Sri Lankan government's optimism about its situation.
"Clearly default is a last resort for the government and would be a blow to their credibility because they have been talking a big game," he said.
While Sri Lanka's bonds have rallied, its debt is among the riskiest of any country not already in default, he added.
(Reporting by Alasdair Pal and Marc Jones; editing by Larry King and Emelia Sithole-Matarise)