Global credit rating agency Fitch expects the three Asia Pacific countries the agency downgraded credit ratings to ‘CCC’ back in 2020 – Laos, Sri Lanka and Maldives - to pick-up growth in 2021.
Fitch stated in a report released last Thursday that though the economic growth is expected to improve in all three countries, creditworthiness is not expected to rise to pre-pandemic levels.
Fitch expects the three economies to post current-account deficits in 2021-2022.
“However, the path of the pandemic and its impact on tourism, a major source of foreign exchange for all three countries, will heavily influence the prospects for external earnings,” stated Fitch in their report.
Highlighting that external liquidity stress may be relieved by financing support, Fitch noted that Maldives secured significant multilateral funding in 2020, as well as access to the G20 Debt Service Suspension Initiative (DSSI). They expect such support will continue in 2021-2022.
Fitch noted that Laos and Sri Lanka, meanwhile, face particular obstacles in accessing IMF financing, but could benefit from bilateral support, including from China.
Challenges in restoring creditworthiness appear most protracted for Sri Lanka.
“Its debt burden is much larger in absolute terms than that of the Maldives and Laos. This may make it harder to find external financing solutions. Its interest costs are also higher as share of fiscal revenue, making debt sustainability more of a challenge,” said Fitch in their report.
Fitch noted that the effects of the crisis have been particularly acute in Maldives and Sri Lanka, where tourism is a large employer and foreign exchange earner.
Fitch estimates that 2020 output from Maldives plunged by 30 percent and that Sri Lanka’s economy shrank by 6.7 percent. In US-dollar terms, the nominal GDP in Maldives fell to levels last seen in 2015 – which was USD 3,423.3 per head).
Fitch said that the added economic stress caused by the pandemic contributed to a material weakening of credit metrics in both Sri Lanka and Maldives, which was a factor in their decision to downgrade the economies to ‘CCC’ in November 2020.
Fitch expects an 18 percent average growth in Maldives in 2021-2022, but stressed the forecast is vulnerable to risks around the pandemic’s impact on tourism.
The forecasts imply that real output in 2022 will still be below 2019 levels in Maldives.
Fitch expects public debt burdens will also rise in ‘CCC’ rated economies, adding to pressures on sovereign creditworthiness. The agency expects general government debt at end of 2022 to reach 105 percent in Maldives.
Fitch states Maldives’ credit ratings ratings could be upgraded if financial support from multilateral sources is sufficient to ease external liquidity pressure, for example, by broadening financing options or facilitating a sustained increase in foreign-exchange reserves.