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Fitch downgrades Sri Lanka’s long-term foreign-currency IDR to ‘CC’

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Fitch Ratings has downgraded Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’. Fitch typically does not assign Outlooks or apply modifiers for sovereigns with a rating of ‘CCC’ or below.

A number of rating actions are as follows.

The downgrade reflects our view of an increased probability of a default event in coming months in light of Sri Lanka’s worsening external liquidity position, underscored by a drop in foreign-exchange reserves set against high external debt payments and limited financing inflows. The severity of financial stress is illustrated by elevated government-bond yields and downward pressure on the currency.

We have affirmed the Long-Term Local-Currency IDR at ‘CCC’, as authorities have continued access to domestic financing, despite high and still-rising government debt and an elevated debt service burden.

Sri Lanka’s foreign-exchange reserves have declined much faster than we expected at our last review, owing to a combination of a higher import bill and foreign-currency intervention by the Central Bank of Sri Lanka. Foreign exchange reserves have declined by about USD2 billion since August, falling to USD1.6 billion at end-November, equivalent to less than one month of current external payments (CXP). This represents a drop in foreign-currency reserves of about USD 4 billion since end-2020.

We believe it will be difficult for the government to meet its external debt obligations in 2022 and 2023 in the absence of new external financing sources. Obligations include two international sovereign bonds of USD500 million due in January 2022 and USD1 billion due in July 2022. The government also faces foreign-currency debt service payments, including principal and interest, of USD6.9 billion in 2022, equivalent to nearly 430% of official gross international reserves as of November 2021. Cumulative foreign-currency debt service, including interest and principal, amounts to about USD26 billion from 2022 through to 2026.

The timing and availability of external resources is unclear and may not be readily available for debt service. The central bank published a six-month roadmap in October that outlined plans to raise additional external borrowings through a number of channels, including bilateral and multilateral sources, syndicated loans and through the monetisation of under-utilised assets in 1Q22.

A drawdown on the existing currency swap facility with the People’s Bank of China (PBOC) could boost reserves by up to CNY10 billion (USD1.5 billion equivalent). However, even with resources from the swap facility, foreign exchange reserves are likely to remain under pressure, in our view. Additional sources of financing could come from an economic support package from India, which contains a swap facility under the South Asian Association for Regional Cooperation currency framework of USD400 million, a swap facility with the Qatar Central Bank, remittances securitisation and a revolving credit facility with the Bank of China Limited (A/Stable). However, even if all these sources are secured, we believe it will be challenging for the government to maintain sufficient external liquidity to allow for uninterrupted debt servicing in 2022.

Press reports suggest the government may be contemplating IMF financing; an IMF programme would unlock multilateral financing, but we believe the Fund could well suggest restructuring to bring about debt sustainability.

Sri Lanka’s external finances are further challenged by a persistent current account deficit, resulting in downward pressure on the exchange rate. We estimate that the deficit widened to about 5.7% of GDP in 2021 and expect it to remain at about 4.0% in 2022, before falling to 2.1% by 2023. A plunge in remittances, a weak tourism recovery and rising imports have contributed to the wider current account deficit. Travel and tourism, an important economic driver, has been hit hard by the COVID-19 pandemic and the outlook for a recovery remains uncertain given the emergence of new highly transmissible virus variants.

The Sri Lankan rupee/US dollar spot exchange rate depreciated by 7%-8% since end-2020, and the central bank intervened to support the currency, exacerbating the decline in reserves.

Wide fiscal deficits continue to worsen the outlook for debt sustainability. The 2021 fiscal deficit target of 8.9% of GDP was missed by a wide margin, and we expect the government deficit to widen to about 11.5% of GDP in 2022. We believe 2022 revenue targets are optimistic, especially in light of our expectation of weak economic activity. We forecast general government debt to reach about 110% of GDP by 2022, and to keep rising under our baseline, absent major fiscal consolidation.

We also believe it is unlikely that Sri Lanka will meet its 2025 government debt reduction target of about 89% of GDP or narrow the fiscal deficit to 4.8% of GDP. Rising interest payments are a major driver of the widening deficit and the interest/revenue ratio of at about 95.0% is well above the peer median of 11.3%.

Sri Lanka’s economic performance is likely to weaken in 2022, as the challenging external position and exchange-rate pressure will have knock-on effects on economic activity. Foreign currency shortages in 2021 hampered food and fuel imports, and continued external liquidity stress could worsen supply shortages, hurting economic activity. We expect growth to slow to 2.0% in 2022, from an estimated 3.6% in 2021, before recovering to 4.3% in 2023 partly due to base effects and a gradual easing of domestic pressures, although downside risks to our forecasts remain. Sri Lanka’s economy was expanding at a modest pace prior to the pandemic, which led real GDP to contract by 3.6% in 2020.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights. This reflects the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Sri Lanka has a medium WBGI ranking at the 47th percentile, reflecting a recent record of peaceful political transitions and a moderate level of rights for participation in the political process. As Sri Lanka has a percentile rank below 50 for the governance indicator, this has a negative impact on the credit profile.



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Berendina bags Silver at the CA Sri Lanka 56th Annual Report Awards

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From left: Sarath Chandra Fernando - Director-BMIC, Charith Fernando - Deputy Managing Director-BMIC, Saman Manatunga - Acting Head of Finance-BMIC, Dilhara Jayasinghe - Assistant Manager Compliance & Corporate Relationship-BMIC, Ranel T Wijesinha - Past President CA Sri Lanka, Jagath Godakanda – Chairman-BMIC, Chaaminda Kumarasiri – Chairman-Annual Report Awards Committee 2021 and Chamila Cooray - Alternate Chairperson-Annual Report Awards Committee 2021

Berendina Micro Investments Company Limited, better known as BMIC among its microfinance clientele and partners, won the Silver award at the 56th Annual Report Awards organized by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), under the category of Finance Companies and Leasing Companies (total assets up to Rs. 20 Billion). Over 70 companies, ranging from conglomerates, multinationals to non-profit organisations, and SMEs, were honoured at this year’s competition for their excellence in financial reporting. The gala event of this year held on 09th December 2021 at BMICH. Being the first Microfinance Company licensed by the Central Bank of Sri Lanka, BMIC is no stranger to this annual competition having won a prestigious Gold Award in 2017 and Merit Award in 2018.

The award from CA Sri Lanka is the fourth award to be won by BMIC during the financial year 2021, having won 3 international awards, namely, ‘The Best Microfinance Company in Sri Lanka’ and ‘The Best Agricultural Lending Company in Sri Lanka’ awards from the UK based Global Banking and Finance Review magazine as well as ‘Donor’s Choice Award’ at the international competition conducted by SCALE Green Creative Adaptation Awards in USA in 2021. Focused on poverty alleviation, BMIC as a Microfinance Institution (MFI) extends micro-credit facilities and enterprise development services that ensure long term sustainability and growth of business ventures of its clients, providing loans at the lowest interest rate compared to other MFIs in Sri Lanka. At present, BMIC manages a loan portfolio of over Rs. 3.1 billion and an annual turnover exceeding Rs. 900 million. It supports well over 70,000 microfinance clients through its 30 Branches in 11 districts. The CA award bestowed on BMIC is another testament to its commitment in continuously supporting its clients to overcome the obstacles during difficult times, while preserving its transparency in reporting, corporate governance, sustainability and social responsibility.

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SLIC repositions Business Club insurance with more focus on SMEs

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Sri Lanka Insurance last week announced repositioning of its Business Club insurance, a trade insurance policy which provides a comprehensive business insurance solution to fit for the diverse insurance need of small and Medium enterprises (SME).

“According to the Export Development Board of Sri Lanka SMEs are considered to be the backbone of the economy with a contribution up to 52% of the GDP. SMEs play a crucial role to battle the poverty in the country providing employment opportunities for the youth as the SMEs does not require capital than large firms. Further SMEs increase tax bases much quickly when compared to large firms,” an SLIC news release explained.

“Recognizing the importance and vital contribution made to the economy by SMEs, Sri Lanka Insurance went back to the drawing board to refine the “Business Club” comprehensive insurance solution to cater to the unique requirements of the businesses,” it said.”

“Therefor the insurance solution was developed to reinforce the success and safety of the businesses.”

The insurance plan will provide protection for any businesses be it retail, grocery store, supermarket, pharmacy or any other covering many perils inclusive of environmental dangers such as floods, cyclone, fire, lightning as well as other factors such as breaking and burglary, SLIC explained.

The release further said an array of main covers are available for businesses inclusive of fire and/or lightening, explosion, malicious damage, aircraft damage, earthquakes along with the free covers such as cost of removal of debris, loss of rental, architect, surveyors, consulting engineering fees, cost of alternative accommodation etc..

A range of additional covers are also available at an additional premium for businesses to choose. Money insurance during transit and while at premises, accidental breakage of glass cover, sign board cover, electronic equipment all risk cover are among the many additional covers offered.

Interested parties who’d like SLIC to assist in developing an insurance solution that covers the business risks can contact SLIC call center on 011 2 357 357.

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German fruit and tea importers stresses importance of packaging

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Jan Paul Bethke, a leading German importer of Sri Lankan fruits and tea, at a recent

EDB-organized event, urged Sri Lankan agri-product exporters to practice effective and superior packaging if they are to be successful in terms of capturing markets in Europe.

“If you package your product well, include a QR code (incorporating extensive details such as the farmer who grew products), and convey a personalized story, customers in advanced markets such as Germany and Europe would develop an affinity with your products”, Bethke noted.

He made these remarks at a Jan. 12 forum forum organized by the Sri Lanka Export Development Board (EDB) on packaging and value addition strategies to enhance Sri Lanka’s agri-product exports to Germany, an EDB news release said.

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