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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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Sri Lanka’s economic confidence index plummets

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‘No one has rated Sri Lanka’s economic condition as excellent. 1.8 % rated it as good and 1.3 % rated it as getting better. The resulting score was a (-) 96. This rating was (-) 83 in January 2022, a wide ranging Verite Research public opinion survey reveals.

Key findings of the survey:

Government approval rating drops from 10% to 3%

The second round of the Gallup Style “Mood of the Nation” poll was conducted in June by Verité Research. It assessed the approval, satisfaction, and confidence of the nation in relation to the government, the country, and the economy.

The poll was conducted as a part of the syndicated survey instrument by Verité Research. This instrument also provides other organisations the opportunity to survey the sentiments of Sri Lanka.

1. Government approval rating | 3% | To the question, “Do you approve or disapprove of the way the current government is working?” only 3% said they approve. In January 2022 this rating was at 10%.

2. Sri Lanka satisfaction | 2% | To the question, “In general, are you satisfied or dissatisfied with the way things are going in Sri Lanka?” only 2% said they were satisfied. This rating was at 6% in January 2022.

3. Economic confidence | negative (-) 96 | Multiple choice questions on the condition and trajectory of the economy are used to generate an economic confidence score. The score can range from negative (-) 100 to positive (+) 100. A score above zero means more people see the economic conditions positively rather than negatively. If everyone thinks the economy is in either excellent or good condition, and everyone also thinks it is getting better, the score will be (+) 10. If everyone thinks that the economy is in a poor condition, and everyone also thinks it is getting worse, the score will be a (-) 100. No one rated the economic condition as excellent. 1.8% rated it as good; and 1.3% rated it as getting better. The resulting score was a (-) 96. This rating was (-) 83 in January 2022.

Implementation of “Mood of

the Nation”

The poll is based on an island wide nationally representative sample of responses from 1,052 Sri Lankan adults, conducted in June 2022. The sample and methodology was designed to ensure a maximum error margin of under 3% at a 95% confidence interval. The polling partner was Vanguard Survey (Pvt) Ltd.

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Decline in share market in the wake of rate hike reports

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By Hiran H.Senewiratne

CSE trading activities began on a positive note yesterday but during the latter part of the day the market experienced a dip on account of the overall supply chain economy being subjected to a contraction, stemming from the fuel crisis. Consequently, CSE activities were relatively low keyed, market analysts said.

“We are reverting to the negative. There is uncertainty on all fronts, from the political to the economic. Therefore, we are expecting a rate hike on Thursday. This is creating a bit of a cloud and we may see this continuing further, a top market analyst said.

Even if top level decision- making is happening in Sri Lanka the impact is not felt at the grassroots level. This has resulted in unrest in the country, the analyst said.

Amid those developments, both indices moved downwards. The All- Share Price Index went down by 97.9 points and S and P SL20 declined by 34.3 points. Turnover stood at Rs 1.3 billion with one crossing. The crossing was reported in JKH, which crossed 600,000 shares to the tune of Rs 73.2 million, its shares traded at Rs 122.

In the retail market, the top seven companies that mainly contributed to the turnover were; Lanka IOC Rs 611 million (7.3 million shares traded), Expolanka Holdings Rs 173.9 million (one million shares traded). LOLC Holdings Rs 47.4 million (120,000 sha4es traded), Hayleys PLC Rs 46.5 million (697.000 shares traded), Browns Investments Rs 46.3 million (6.4 million shares traded), JKH Rs 21 million (173,000 shares traded) and Softlogic Holdings Rs 20.5 million (794,000 shares traded). During the day 109 million share volumes changed hands in 15000 transactions.

The International Monetary Fund said last Thursday its talks with crisis-hit Sri Lanka had been “constructive”, thereby raising hopes it would soon grant preliminary approval for a desperately needed financial support package, observers said.

Meanwhile, the Colombo Consumer Price index rose 54.6 per cent year-on-year in June against a 39.1 per cent rise in May, according to the Statistics Department.

Yesterday the US dollar rate was Rs 360.73, which is now being controlled due to the prudent fiscal and monetary policies of the Central Bank.

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Dialog Club vision members receive access to an exclusive screening of ‘Jurassic World Dominion’

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In a bold and breath-taking new global adventure, the epic conclusion to the Jurassic film franchise ‘Jurassic World Dominion’ hit theatres across the world on June 10. Just a day after its global premiere, Dialog Club Vision Red members and their loved ones received special access to an exclusive screening of the film at the Kandy City Centre Multiplex on June 11.

The explosive end to the Jurassic era sees two generations of the film’s franchise unite for the first time with Hollywood’s Chris Pratt and Bryce Dallas Howard joined by Oscar winner Laura Dern, Jeff Goldblum and Sam Neill. Dialog Club Vision members were some of the first to witness the utopian world where Dinosaurs and humans co-exist.

With the best interests of its members and their loved ones at heart, Dialog Club Vision continues to deliver a world of exclusivity and privileges such as personalized care, exclusive discounts and offers, lifestyle and entertainment events and more. To explore more exciting offers available for Dialog Club Vision members, and to learn more about Sri Lanka’s premier loyalty programme, customers can visit the MyDialog App or visit dialog.lk/club-vision

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