Two of the world’s top credit rating agencies have warned that Sri Lanka is set to default on its loans.
Fitch Ratings downgraded the South Asian country, stating that “a sovereign default process has begun.”
S&P Global Ratings issued a similar statement, stating that a default is now a “virtual certainty.”
Sri Lanka said this week that it will temporarily default on its international obligations as it grapples with its greatest economic crisis in over 70 years.
In the meantime, officials have asked Sri Lankans working overseas to bring money home in the face of large protests over significant power outages and rising food and fuel prices.
On Wednesday, the country’s new central bank governor requested donations in sterling, US dollars, and euros.
The funds “shall be used solely for the importation of essentials such as food, gasoline, and medicine,” he stated.
Sri Lanka is expected to pay $78 million (£59.4 million) in interest on its international sovereign bonds on Monday.
If the payment is not made during the 30-day grace period, the country will default on its foreign debt for the first time since its independence from the United Kingdom in 1948.
Sri Lanka is rated “near default” by Fitch, with the country’s “payment capacity irreversibly damaged.”
“Once a payment on an issuance is missed and the grace period has ended, we will lower the [rating],” the firm stated in a statement on Wednesday.
Sri Lanka was also downgraded by S&P, citing the “virtual inevitability of a default on some concerned commitments.”
The ratings agency said it needed additional information about Sri Lanka’s debt restructuring plan, as well as confirmation that the government had failed to pay its creditors.
In a note, S&P added, “We expect the government to miss paying these coupons.” A bond’s interest payment is called a coupon.
Credit ratings are designed to help investors understand the level of risk they are taking on when purchasing a financial instrument, in this case a sovereign bond.
The Sri Lankan government announced on Tuesday that it will temporarily default on $35.5 billion in foreign debt.
The impact of the pandemic and the war in Ukraine, according to the country’s financial ministry, made it “difficult” to pay its creditors.
Next week, the country will begin talks with the International Monetary Fund (IMF) on a loan package to help it get its economy back on track.
It depreciated its currency sharply last month in preparation for negotiations with the IMF about a bailout.
