Fitch Ratings has downgraded Sri Lanka's long-term foreign-currency issuer default rating, citing political upheaval that has resulted in the country having no functional government.
Fitch says it lowered the country's rating to B from B plus with a stable outlook, reflecting heightened external financing risks, uncertain policy outlook and a slowdown in fiscal consolidation.
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Sri Lanka is now without a government after a court ordered disputed Prime Minister Mahinda Rajapaksa and his ministers to refrain from conducting their duties as it hears a case challenging their eligibility to hold office after losing two no-confidence votes in Parliament.
"Fitch believes the ongoing political upheaval, which has disrupted the normal functioning of Parliament, exacerbates the country's external financing risks, already challenged by the tightening of global monetary conditions amid a heavy external debt repayment schedule between 2019 and 2022," Fitch said in a statement.
"Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate. The sovereign's foreign currency-denominated debt repayments, as of end-September 2018 are about $20.9 billion between 2019 and 2022, while its foreign-exchange reserves are currently about $7.5 billion."
A large chunk of Sri Lanka's borrowings are related to China-funded infrastructure projects.
The political crisis arose after President Maithripala Sirisena sacked Ranil Wickremesinghe as prime minister and replaced him with Rajapaksa.
Wickremesinghe insisted that his sacking was illegal and has refused to vacate the prime minister's official residence.
Rajapaksa moved into the prime minister's office but failed to form a parliamentary majority.
Parliament voted Rajapaksa and his Cabinet out twice, but they held on to their positions with Sirisena's backing. Sirisena has said the votes violated parliamentary procedure.
Lawmakers opposed to Rajapaksa have moved in court that Rajapaksa and his ministers can't hold office after the no-confidence votes. The Court of Appeal ordered them to stop functioning in their positions, saying decisions made under a state of dispute could cause irreversible damage to the country.
Rajapaksa and his ministers have been summoned by the court on Dec. 12 to explain on what basis they held office after the no-confidence votes.