Fitch Ratings has further downgraded Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’, and has affirmed the Long-Term Foreign-Currency IDR at ‘RD’ (Restricted Default). Fitch typically does not assign Outlooks to ratings of ‘CCC+’ or below.

Fitch has also removed the Long-Term Local-Currency IDR from Under Criteria Observation, on which it was placed on 14 July, following the publication of the updated Sovereign Rating Criteria.

Sri Lanka continues to service its local currency debt, but the downgrade of the Long-Term Local-Currency IDR reflects our view that a local-currency debt default is probable, in view of an untenably high domestic interest payment/revenue ratio, high interest costs, tight domestic financing conditions and rising local-currency debt/GDP in the context of high domestic fiscal financing requirements, which authorities forecast at about 8% of GDP in 2022.

According to authorities, domestic interest payments in 8M22 were Rs. 718.8 billion, taking the domestic interest/revenue ratio to an estimated 56% in 8M22; the highest among sovereigns rated ‘CCC+’ and below.

Reliance on Central Bank financing has increased, as domestic options are limited. Domestic debt rose to about 53% of Government debt by end-July 2022, according to official provisional data. Treasury bill issuance has been increasing.

Fitch expects a local debt restructuring would aim to maintain financial system stability, for example, by extending maturities or lowering coupon payments, rather than a reduction in face value. Sri Lanka continues to service its local-currency debt.

The sovereign remains in default on foreign-currency obligations and has initiated a debt restructuring arrangement with official and private external creditors.

The Ministry of Finance issued a statement on 12 April that it had suspended normal debt servicing of several categories of external debt, including bonds issued in international capital markets, foreign currency-denominated loan agreements and credit facilities with commercial banks and institutional lenders.

Fitch downgraded the Long-Term Foreign-Currency IDR to ‘RD’ following the expiry of the 30-day grace period on coupon payments that were due on 18 April 2022.

A Staff-Level Agreement with the IMF was reached on 1 September for $ 2.9 billion, for 48 months, under the Extended Fund Facility. The facility will not be approved until Sri Lanka has implemented agreed actions, financing assurances have been received from official creditors and good-faith efforts have been made to reach agreement with private creditors.

Banking Sector Faces Tight Liquidity: Sri Lankan banks’ access to foreign-currency funding is constrained by the sovereign default. Any local-currency debt restructuring would elevate funding and liquidity stress, given the predominance of local-currency funding, at 74% of the total, and large holdings of local currency-denominated Government securities.

A restructuring could necessitate recapitalization by the Government, though further regulatory forbearance measures could keep banks compliant with regulatory minimums on a reported basis, however, underlying capital positions could stay weak.

Another luxury cruise ship, Azamara Quest arrived at the Colombo Port yesterday carrying more than 600 passengers, mainly from the US the third luxury cruise with in 16 days from the arrival of the first such cruise liner signaling the revival of the country’s hospitality industry.

Tourism Ministry is planning to promote nautical tourism and the luxury passenger cruise ship arrivals harnessing the potential in the economic Development of Sri Lanka.

All ingredients already provided by nature, it is time, Sri Lanka is to take a special interest in emphasizing that Sri Lanka really concentrate on developing the Nautical Tourism as a special niche in its new phase of Tourism Development”.

Tourism Ministry also explores the possibility of partnering top blue-chip companies to enter the lucrative 40 billion dollar cruise line business that is estimated to carry 22.3 million passengers, with the market growing at 3.2% in volume.

Azamara Quest is an R-class cruise ship that entered service for Azamara Cruises on 24 October 2007. She was built in 2000 for Renaissance Cruises as R Seven.

The Azamara Quest carries about 710 passengers (double occupancy) plus 410 crew members (1:2 staff to guest ratio). The ship is in Colombo today and it will call at the Hambanthota port on Monday.

The previous luxury cruise ship carrying 2,000 visitors docked in Sri Lanka on Tuesday 29 November reviving tourism prospects on the island battered by the long-term effects of coronavirus lockdowns and months of political instability along with the economic crisis this year.

This Mein Schiff 5 arrived in Colombo five days ago after luxury cruise liner Viking Mars docked at the Colombo Port on on November 18, sparking hopes that the struggling tourism sector might finally be moving towards its pristine days.

Tourism Minister Harin Fernando said that it was “heart-warming” to see the luxury cruise in Colombo.

“Having a cruise ship in the country is similar to having 10 aircraft full of tourists,” the minister said.

Last week, the Norwegian luxury passenger cruise ship Viking Mars arrived on the island with some 1,000 people on board 16 days ago The minister said luxury cruise liners began to operate on the island after a six-month hiatus.

Sri Lanka suffered months of social unrest as deadly antigovernmental protests hit the island, with people angry over the alleged mismanagement of the economic crisis.

Minister Fernando said the country expected two to three more passenger ships in December. “The cruises will build a positive image of the country through word of mouth. That is what the country needs now,” he said.

Amidst mounting people’s protest Adani Group of Indian multi billionaire business magnet Gautam Shantilal Adani’s ambitious mega port project in s Kerala state is nearing completion for the opening next year, informed official sources said.

India’s Kerala state will proceed “no matter what” with US $900 million port project and is open to deploying federal police if needed to protect it from protesters blocking construction, Indian news agencies reported.

New Delhi is determined to implement strategic plans to compete Colombo port’s dominance of transshipment, although Indian ports are considered vastly uncompetitive vis-a-vis Colombo, or other regional hubs, in terms of tariff levels.

Adani Group’s development of a transshipment terminal at Vizhinjam, a green-field, deep water site about 10 miles south-west of Trivandrum in Kerala state, is directed towards taming Colombo Port in the long run, a senior official of the Sri Lanka Ports Development Authority (SLPA) said.

The local fishing community, led by Catholic priests, has blocked construction of Vizhinjam port by Adani Group for almost four months, erecting a makeshift shelter at the port’s entrance.

The protesters say the huge project causes coastal erosion that has undermined their livelihoods, calling for a complete halt on the construction.

Clashes between police and protesters last weekend injured more than 100 people, including 64 police men Indian media reports revealed.

Gautam Adani, whose empire spans gas and power projects as well as a ports and logistics business valued at some $23.5 billion, has described Vizhinjam as an “unmatched location” on the critical east-west shipping route.

SLPA official also noted that the flow of feeder services from India into Colombo continued to be on schedule. However, the authority said the foreign exchange crisis had crimped the pace of import container clearance from the port, but “this situation is improving”, it added.

Colombo is one of the busiest hub gateways in South Asia. With the Sri Lankan crisis unlikely to fade any time soon, Indian port leaders spot a more “realistic” opportunity to bid on transshipment cargo moving in and out of the region by wooing mainline operators seemingly frustrated with Colombo woes.

The ports of Cochin, Tuticorin and Chennai are leading those efforts taking advantage of the Country’s situation.

Despite India has a huge break bulk cargo market segment which can get containerized. With India building its container handling capacity, this break bulk traffic will gradually get converted into containerized cargo which will help the Port of Colombo to be of greater importance to the Indian trade, SLPA official said

India building its container ports can only complement and supplement our efforts. Therefore expediting port infrastructure investments and improving “Ease of Doing Business” would keep Colombo ahead of competition, he claimed.