Short-term political risk, Two countries upgraded: Sri Lanka and Uganda

In the framework of its regular review of short-term (ST) political risk, Credendo has upgraded two countries.

• Sri Lanka: upgrade from 7/7 to 6/7

The economic and financial situation in Sri Lanka has been slowly improving, which is reflected by a rupee that has on average stabilised vis-à-vis the US dollar over the past six months. In a difficult global economic environment, the country has been benefiting from rising tourism arrivals and remittances inflows – two main foreign currency sources that are contributing to improve the current account balance, which has been posting a surplus since Q3 2022. Those developments are supporting liquidity. Moreover, Sri Lanka is expecting new external loans in the short term, starting with a loan from the IMF. Indeed, after a four-year Extended Fund Facility (EFF) programme was approved in March, the authorities have made progress in alleviating the future public debt burden by agreeing to a domestic debt restructuring in July. This should pave the way to fresh IMF funds, followed by extra multilateral financial support. As a result, foreign exchange reserves are likely to be further boosted and could remain at a level of above six weeks of imports in the coming months. Therefore, Credendo has upgraded the country’s short-term political risk classification to 6/7. This being said, the IMF recently decided to postpone its next loan disbursement, considering Colombo’s reforms to raise fiscal revenues insufficient. In the coming months, close attention will remain on the ongoing but slow and challenging external debt restructuring negotiations with private and official creditors. Any deal could indeed help to alleviate future liquidity pressures.