Caa1 Is Junk

By Kumar David –OCTOBER 8, 2020

Prof. Kumar David

Moody’s Investor Service last week dropped Lanka’s sovereign rating from B2 to Caa1, a two-tier drop bypassing B3. rating on. Moody’s defines Caa as “speculative, of poor standing and subject to very high credit risk”. The corresponding Standard & Poor and Fitch rating is CCC, CC or C. Rating agencies have two-sided responsibility to investors and debtors but this double whammy is harsh. A one tier downgrade was unavoidable since long-term prospects for the economy are poor. Recent improvements (remittances rising to pre-COVID levels, sharp reduction in imports, fall in 2020 balance of payments deficit from a feared $8 billion to an expected $6 billion deficit, and enhanced activity in the domestic economy) though touted by the Finance Ministry seem to have been dismissed as short-term gains. Sadly, the medium-term outlook, especially the looming fiscal (budget) deficit and the employment picture remain bad. Not all Cabraal’s rantings could have deflected a one-tier downgrade to B3 but why a two-tier? [Late note: The outbreak of Community Transmitted Covid on a large scale in the last few days could devastate the economy but this cannot be discussed here today].

Three possible reasons are imputed. First, a Western foreign policy plot to pressure the government to distance itself from China. This we can discard; investment agencies don’t work like that. The second is fear that pending constitutional changes (20A etc) will destabilise the economy – rather than result in a strong regime that will rebuild it. On Sunday 3 Oct I floated the notion that Gota-Autocracy will be chaotic in decision making. I don’t know if Moody’s thinks likewise. Third, the most likely reason is that prospects for the economy are worse than even pessimists like I had anticipated.  Let me explore one such item; inability to open for business with the world; failure to open Colombo airport is symbolic and a sign of deep trouble. Can you believe it the story now is about restarting tourism, not opening for business! Tourists will be quarantined for 14 days on arrival in groups of 10 to 50. It is intended to permit arrivals at Mattala only. “A tentative date for the opening of BIA cannot be given”, according to Chandrasiri, Airport Services Chairman. Visitors will be required to stay in designated hotels and movement permitted only as a group to limited destinations. Of course, there will be no takers but the worst is that imagined tourists, not professional and business travellers, have occupied the deranged minds of the planners.

Lanka spent $270 million to build the Mattala Rajapaksa Airport, which opened in 2013. Classified as the world’s emptiest airport and a vanity project, none of MR’s administrators, planners or engineers told the boss that he was going off the rails. Lankan officials are known unequivocal sycophants. The ghost airport is a shame which should make all who had a hand in it hang their heads. BIA Katunayake, the country’s only real airport is not be reopened, but fantasised post-Covid tourist traffic will be “attracted” to Mattala. Have the Health Authorities counselled that the salubrious air of Hambantota will shoo away ‎the SARS-CoV-2 virus?

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