The risks to debt servicing capacity have risen, as the government's access to external financing has become increasingly dependent on favourable business, economic, and financial conditions.
The downgrade stems in part from the impact of Covid-19, which has significantly narrowed the government's fiscal space and its capacity to generate earnings through sectors such as tourism, S&P
“We forecast the economy
will contract sharply by 5.3 per cent in 2020 largely due to the Covid-19 pandemic. Although the negative economic impact likely peaked in the second quarter of 2020, the nascent recovery was derailed by another wave of infections in early October," S&P
While the country has not re-imposed stringent lockdown measures, leading indicators, including the Purchasing Managers Index, showed a sharp pullback in activity. Any economic recovery before widespread availability of a vaccine is likely to be muted and prone to reversals as Covid-19 developments could be unpredictable and many neighboring countries experienced repeated waves of infections.
“Nevertheless, we believe Sri Lanka's economy
will recover in 2021, boosted by a stabilization in domestic activity and expansionary monetary and fiscal settings. External demand should also recover more strongly, particularly if tourism flows could restart”, it added.
The real gross domestic product growth is expected to accelerate to 4.3 per cent in 2021, albeit from a low base, and average 4.5 per cent in 2021-2023, S&P said.
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