Standard & Poor's Ratings Services revised the outlook on its 'B+' long-term sovereign credit ratings on Sri Lanka to negative from stable.
It also affirmed the long-term rating and the 'B' short-term credit rating and left their transfer and convertibility risk assessment on Sri Lanka unchanged at 'B+'.
The negative outlook reflects rising pressure on Sri Lanka's external liquidity resulting from a weaker trade balance and remittances, and short-term capital outflows that have eroded its reserve buffers.
The outlook also reflects the country's weakened public finances. "We expect sizable and rising projected fiscal deficits to push borrowings higher in 2016-2019. In our view, the authorities face significant challenges in effectively addressing the rising imbalance due to institutional constraints and a fragmented political landscape.
The rating constraints on Sri Lanka are the country's weak external liquidity and a high general government net debt burden (at 72% of GDP in 2015).
Sri Lanka's general government dedicates a higher share of its revenues to interest payments and it is among the highest in the world (39% in 2015). With GDP per capita at US$ 4,000 (2016), Sri Lanka's level of prosperity is low. Another credit weakness lies in what we consider as an uncertain commitment and capacity to fiscal consolidation following the 2015 parliamentary elections and the 2016 budget delivered on November 20, 2015.
Institutional capacity remains low by international standards and poses risks to the effectiveness and predictability of Sri Lanka's policy choices. These rating constraints weigh against Sri Lanka's robust growth prospects, which are above average for sovereigns at similar levels of development,S&P said yesterday.
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