SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Sri Lanka a score equivalent to a rating of ‘B+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
– External Finances: -1 notch to reflect high refinancing needs against relatively low foreign-
currency reserves, which leave the external position vulnerable to any adverse shifts in investor sentiment.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that individually, or collectively, could trigger a positive rating action are:
– Improvement in external finances supported by lower net external debt or a reduction in refinancing risks, for example from a lengthening of debt maturities.
– Improved macroeconomic policy coherence and credibility.
– Stronger public finances underpinned by a credible medium-term fiscal strategy that places GGGD/GDP on a downward path.
The main factors that, individually or collectively, could trigger negative rating action are:
– Increase in external funding stresses accompanied by a loss of investor confidence that threatens the ability to repay external debt.
– A deterioration in policy coherence and credibility, leading to lower GDP growth and/or
– An increase in GGGD/GDP, potentially reflecting wider budget deficits and/or a crystallisation of contingent liabilities – linked to state-owned entities or government-guaranteed debt – on the sovereign balance sheet.
– Global economic outcomes are consistent with Fitch’s latest Global Economic Outlook.
– Sri Lanka has an ESG relevance score of ‘5’ for political stability and rights as World Bank governance indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
– Sri Lanka has an ESG relevance score of ‘5’ for rule of law, institutional and regulatory quality and control of corruption as World Bank governance indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
– Sri Lanka has an ESG relevance score of ‘4’ for human rights and political freedom as World
Bank governance indicators have the highest weight in Fitch’s SRM and are relevant to the rating and a rating driver.
– Sri Lanka has an ESG relevance score of ‘4’ for creditors’ rights as willingness to service and
repay debt is relevant to the rating and a rating driver.