LONDON, July 19 (Reuters) - Moody's Investors Service on Monday said it had placed the government of Sri Lanka's Caa1 rating under review for downgrade, citing the risk of default due to falling foreign exchange reserves.
The ratings agency said the decision, which applies to Sri Lanka's foreign currency long-term issuer and senior unsecured debt ratings, reflected an increasingly fragile external liquidity position.
Investors and analysts are weighing the likelihood of Sri Lanka defaulting on its debt, with a fiscal deficit expected by Moody's to average 8.5% over the next two years and interest payments likely to remain around 60-70% of government revenue over the next few years.
Central bank governor W. D. Lakshman this month expressed confidence in an improvement in Sri Lanka's external situation and voiced confidence that it could avoid an International Monetary Fund bailout.
Moody's said its decision reflected governance weaknesses in the ability of institutions to take measures to mitigate urgent risks to the balance of payments.
Without an IMF programme, Sri Lanka would need to secure more loans from China or India to help maintain sufficient reserves to repay the $3.7 billion of bond payments by the end of 2023, Oxford Economics estimated last week.
Sri Lanka, whose vital tourism industry has been devastated by the coronavirus pandemic, could get $800 million worth of reserves from the IMF as a part of a new allocation of special drawing rights by August or September, Lakshman said earlier this month.
Moody's said Sri Lanka's financing options remained narrow, with borrowing costs in international markets still prohibitive.
"Absent large and sustained capital inflows through a credible external financing strategy, Moody's expects Sri Lanka's foreign exchange reserves to continue declining from already low levels, further eroding its ability to meet sizeable and recurring external debt servicing needs, and increasing balance of payment risks," the ratings agency said.
(Reporting by Tom Arnold; Editing by Nick Macfie)