S&P Global Ratings downgraded Sri Lanka's long-term sovereign credit ratings to CCC+/C from B-/B, saying the country's fiscal position is expected to deteriorate over the next few years due to a lack of favorable economic and fiscal conditions.

The downgrade reflects the economic fallout from the coronavirus pandemic, which has narrowed the government's fiscal space and capacity to generate income through various sectors such as tourism and has exacerbated risks to debt servicing capacity.

"Existing funding support from official sources do not appear sufficient to cover financing needs. This means that Sri Lanka may need external commercial funding, which can be difficult and costly," the rating agency said.

"High fiscal deficits and excessive domestic liquidity will put downward pressure on the exchange rate and worsen the risks associated with the government's already-high debt burden," added the rating agency, which projected Sri Lanka's fiscal deficit to remain elevated at 10.2% of GDP in 2021 before narrowing to 8.4% in 2023.

The rating agency expects the Sri Lankan economy to contract 5.3% in 2020, largely due to the pandemic, before recovering in 2021 with growth of 4.3% on the back of a stabilization in domestic activity and a rebound in external demand.

The stable outlook on Sri Lanka reflects the relatively balanced risks facing the country over the next 12 months, the rating agency said.

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.