Sri Lankan economy takes hit of political crisis; faces credit rating cuts

Two international credit rating agencies downgraded Sri Lanka by one notch on Tuesday following almost six weeks of political crisis.

Fitch said it believed Sri Lanka's political upheaval, which began with the sacking of its prime minister in October and has disrupted the functioning of parliament, exacerbates the Indian Ocean nation's external financing risks.

Along with Standard and Poor's, it warned that Sri Lanka was heading for tougher times with politics complicating the effects of a challenging external environment.

"Investor confidence has been undermined, as evident from large outflows from the local bond market and a depreciating exchange rate," Fitch said.

Fitch downgraded Sri Lanka from B plus to B, while Standard and Poor's also cut its rating from B plus to B.

The crisis began on October 26 when President Maithripala Sirisena removed Ranil Wickremesinghe as prime minister and replaced him with the flamboyant but controversial Mahinda Rajapakse.

However with Wickremesinghe's supporters still controlling a majority in parliament Rajapakse has lost two votes of confidence.

On Monday the Court of Appeal denied Rajapakse the authority to act as prime minister and stripped his cabinet of their powers, giving Rajapakse until next Wednesday to prove his legitimacy.

Last month Moody's also lowered Sri Lanka's rating from B1 to B2.

Sri Lanka has already abandoned plans after the Moody's downgrade to raise money through sovereign bonds and will pursue badly-needed revenue elsewhere.

Sirisena's economic advisor said last month that "alternative finance" raised locally would service much of Sri Lanka's $4.5 billion in foreign debt repayments due in 2019.

He said Sri Lanka would seek to extend a $1-billion loan from China by an additional $500 million, but would only turn to international markets for cash "as a last resort".

Sri Lanka's unrest has also prompted the International Monetary Fund to suspend a tranche of a $1.5-billion bailout loan agreed to in 2016.

(With inputs from agencies.)