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S&P lowers Sri Lanka's outlook to negative on fiscal consolidation risks

S&P Global Ratings revised its outlook on Sri Lanka's sovereign credit rating to negative from stable, saying the country could shift away from fiscal consolidation over the next two to three years.

The rating agency said the wide-ranging tax cuts announced by the Sri Lankan government is forecast to widen the country's fiscal deficit by up to 1.0% of GDP in 2020. "Beyond 2020, we believe it could be difficult for the government to sustain a fiscal consolidation path without new revenue measures," it said.

The tax cuts also undermine debt sustainability, according to S&P Global Ratings, which projected a net general government debt-to-GDP ratio of 83.1% for Sri Lanka in 2020. "A weaker fiscal position will add to the government's extremely high debt stock," the debt watcher added.

More than 40% of Sri Lanka's total public debt is denominated in foreign currency, making the country vulnerable to exchange rate movements and changes in global credit conditions, S&P Global Ratings warned.

Balancing Sri Lanka's fiscal deficits and government debt levels are improved prospects for the economy, the rating agency said. Economic growth is forecast to accelerate to 4% in 2020 due to the government's tax cuts, from an estimated 2.7% expansion in 2019, when terrorist attacks negatively affected the key tourism sector. Real GDP growth is expected to average 3.8% through 2020, with the tourism sector enjoying a stronger recovery in the coming quarters.

In addition, upcoming parliamentary elections could resolve the political uncertainty in recent years that has weighed on policy-making, business confidence, investment and overall growth prospects, according to S&P Global Ratings. The country elected a new president in November 2019.

S&P Global Ratings affirmed Sri Lanka's long- and short-term foreign and local currency credit ratings at B.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.