Fitch Ratings revised down the outlook on Sri Lanka's long-term foreign-currency issuer default rating to negative from stable amid growing risks to debt sustainability.
The country's fiscal policy has moved away from revenue-based consolidation, creating policy uncertainty and raising external financing risks given the large external debt repayments coming up in 2020 and beyond, Fitch wrote.
Sri Lankan President Gotabaya Rajapaksa's recent changes to value-added tax and elimination of the nation building tax are projected to lower the country's revenue by up to 2% of GDP, according to the rating agency. Rajapaksa lowered the VAT rate to 8% from 15% and raised the liable limit for VAT registration to 300 million Sri Lankan rupees.
Fitch expects Sri Lanka's fiscal deficit to reach 6.5% of GDP in 2020 and 6.2% of GDP in 2021, compared with earlier expectations of 5.0% of GDP in both years.
The rating agency added that adjusting excise taxes and spending cuts on recurrent expenses and non-priority public investment may help partially mitigate the impact of revenue loss, while the government could announce further offsetting measures as well.
Fitch affirmed Sri Lanka's issuer default rating at B.
As of Dec. 20, US$1 was equivalent to 181.12 Sri Lankan rupees.