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Fitch Downgrades Sri Lanka’s Long-Term Local-Currency IDR to ‘CC’

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FitchRatings has downgraded Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CC’, from ‘CCC’, and has affirmed the Long-Term Foreign-Currency IDR at ‘RD’ (Restricted Default). Fitch typically does not assign Outlooks to ratings of ‘CCC+’ or below.

Fitch has also removed the Long-Term Local-Currency IDR from Under Criteria Observation, on which it was placed on 14 July 2022, following the publication of the updated Sovereign Rating Criteria.A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

Challenging Domestic Financing Outlook:Sri Lanka continues to service its local-currency debt, but the downgrade of the Long-Term Local-Currency IDR reflects our view that a local-currency debt default is probable, in view of an untenably high domestic interest payment/revenue ratio, high interest costs, tight domestic financing conditions and rising local-currency debt/GDP in the context of high domestic fiscal financing requirements, which authorities forecast at about 8% of GDP in 2022.

According to authorities, domestic interest payments in 8M22 were LKR718.8 billion, taking the domestic interest/revenue ratio to an estimated 56% in 8M22; the highest among sovereigns rated ‘CCC+’ and below. Reliance on central bank financing has increased, as domestic options are limited. Domestic debt rose to about 53% of government debt by end-July 2022, according to official provisional data. Treasury bill issuance has been increasing. We expect a local debt restructuring would aim to maintain financial system stability, for example, by extending maturities or lowering coupon payments, rather than a reduction in face value. Sri Lanka continues to service its local-currency debt.

External Debt Restructuring:The sovereign remains in default on foreign-currency obligations and has initiated a debt restructuring arrangement with official and private external creditors.The Ministry of Finance issued a statement on 12 April 2022 that it had suspended normal debt servicing of several categories of external debt, including bonds issued in international capital markets, foreign currency-denominated loan agreements and credit facilities with commercial banks and institutional lenders.

Fitch downgraded the Long-Term Foreign-Currency IDR to ‘RD’ following the expiry of the 30-day grace period on coupon payments that were due on 18 April 2022. A staff level agreement with the IMF was reached on 1 September for USD2.9 billion, for 48 months, under the Extended Fund Facility. The facility will not be approved until Sri Lanka has implemented agreed actions, financing assurances have been received from official creditors and good-faith efforts have been made to reach agreement with private creditors. The timing of completion of the external debt restructuring remains uncertain.

Banking Sector Faces Tight Liquidity:Sri Lankan banks’ access to foreign-currency funding is constrained by the sovereign default. Any local-currency debt restructuring would elevate funding and liquidity stress, given the predominance of local-currency funding, at 74% of the total, and large holdings of local currency-denominated government securities. A restructuring could necessitate recapitalisation by the government, though further regulatory forbearance measures could keep banks compliant with regulatory minimums on a reported basis, however, underlying capital positions could stay weak.

Budget Aims for Fiscal Consolidation:In the 2023 budget authorities aim to lower the deficit to 9.8% of GDP in 2022 and 7.9% of GDP in 2023, factoring in high revenue growth and a pickup in spending. It also aims to raise government revenue to 15% of GDP by 2025 and reduce public sector debt to no more than 100% of GDP over the medium term, in line with the IMF’s target of a primary surplus of 2.3% of GDP by 2025. We expect a contraction in GDP in 2023 and so are less optimistic on the government’s fiscal consolidation path. We expect general government debt/GDP to reach around 109% by end-2022.

Political Risks Weigh on Fiscal Outlook:Political instability could threaten reform implementation. The government’s parliamentary position appears strong, but the government lacks public support. This increases the risk of further destabilising protests if economic conditions do not improve or reforms generate public opposition. President Wickremesinghe was prime minister in the previous administration under President Rajapaksa, who was brought down by protests. Parliament and the government also remain dominated by politicians who are affiliated with the Rajapaksa family.

High Inflation: Inflation is high, although it has declined from its September peak of 69.8% as measured by the Colombo Consumer Price Index. We expect headline inflation to fall further in 2023 on easing domestic supply conditions, lower food prices and the impact of policy rate hikes. Risks remain, from a potential commodity-price shock, particularly owing to the war in Ukraine. Financing from the Central Bank has been a key funding source for the government, but a new Central Bank Act, may limit such financing in the future. We believe rate hikes have peaked, after a policy rate hike of 950bp in 2022.

Economy Contracting:Sri Lanka’s economy contracted by a sharp 4.8% yoy in 1H22 and we expect a full-year GDP contraction of 6.0%. There is still uncertainty about the pace of the country’s economic outlook in 2023, partly because the timing of the external debt restructuring is unknown. We forecast growth to contract by 2.2% in 2023 then to pick up in 2024 under our baseline.



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Supreme Court Judge, President of the Appeal Court, Appeal Court Justice took oath before President

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(pic PMD)

Justice K. P. Fernando, President of the Court of Appeal took oath as a Supreme Court Judge before President Ranil Wickremesinghe this morning (06) at the President’s House in Fort.

Court of Appeal Justice Mr. Nissanka Bandula Karunaratne took oath as the President of the Court of Appeal while High Court Judge M.A.R. Marikkar was also sworn in as a Judge of the Court of Appeal before President Ranil Wickremesinghe.

Minister of Justice Wijayadasa Rajapaksha, Secretary to the President Mr. Saman Ekanayake, Commanders of the Tri Forces and other officials attended this event.

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Strong earthquake hits south-eastern Turkey near Syria border

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BBC reported that a powerful earthquake has hit Gaziantep in south-eastern Turkey, near the border with Syria.

The US Geological Survey said the 7.8 magnitude tremor struck at 04:17 local time (01:17 GMT) at a depth of 17.9km (11 miles) near the city of Gaziantep.

The quake was felt in the capital Ankara and other Turkish cities, and also across the region.

Reports are coming in that several buildings have collapsed, and a number of people may be trapped.

A BBC Turkish correspondent in Diyarbakir reports that a shopping mall in the city collapsed.

Rushdi Abualouf, a BBC producer in the Gaza Strip, said there was about 45 seconds of shaking in the house he was staying in.

Turkish seismologists estimated the strength of the quake to be 7.4 magnitude.

They said that a second tremor hit the region just minutes later.

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13 A: Political parties miss Ranil’s Feb. 04 deadline for submitting their proposals

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Udaya compares constitutional threat with Indonesian crisis in late ’90s

By Shamindra Ferdinando

The government hasn’t received proposals from political parties regarding President Ranil Wickremesinghe’s decision to implement the 13th Amendment to the Constitution fully.

President Wickremesinghe, on January 26, requested party leaders to furnish their suggestions, if any, by Feb. 04 as he intended to brief Parliament on Feb. 08 as regards the implementation of land and police powers.

Political parties, represented in Parliament, had not responded to President Wickremesinghe’s request so far, authoritative sources told The Island. Responding to another query, sources said that the President’s Office hadn’t received proposals in support of President Wickremesinghe’s declaration or against it.

Several political parties, including the main Opposition Samagi Jana Balavegaya (SJB) and the Janatha Vimukthi Peramuna (JVP) spurned the President’s invitation.

Having declared his intention to fully implement the 13th Amendment to the Constitution, enacted in Nov. 1987, during Thai Pongal celebrations, in Jaffna, on January 15th, 2023, President Wickremesinghe warned party leaders on January 26 he would go ahead with plans unless the parliament repealed it. Both declarations were made in the presence of Prime Minister Dinesh Gunawardena.

Sources noted that though several political parties declared opposition and some issued statements supportive of the President’s move, they haven’t submitted proposals in writing.

President Wickremesinghe prorogued Parliament, on January 27, the day after setting Feb. 04 as the deadline for political parties to submit proposals. The new session of Parliament begins on Feb. 08.Sri Lanka Podujana Peramuna (SLPP) General Secretary, Sagara Kariyawasam, MP, told The Island that the decision to fully implement the controversial amendment shouldn’t be taken hastily.

“We are certainly not opposed to the devolution of power. However, we cannot under any circumstances support an agenda that may cause chaos,” National List MP said.

The Attorney-at-Law said so when The Island asked him whether the ruling party submitted its proposals to President Wickremesinghe.The lawmaker said that there was no requirement to do so as he on behalf of the SLPP explained to the January 26 meeting chaired by President Wickremesinghe why 13th Amendment shouldn’t be fully implemented without examining the ground situation.

“Seven past Presidents didn’t do that. Why didn’t they do so? We’ll have to study why they refrained from granting police and land powers in spite of them being part of that Amendment. If the reasons that compelled them not to do so no longer exist, we can consider the proposals,” lawmaker Kariyawasam said.

Declaring SLPP’s commitment to maximum possible devolution, MP Kariyawasam warned of dire consequences if decisions were made on the basis of language and religion.The SLPP that secured 145 seats at the last general election remains the largest party in parliament though over two dozen MPs quit the government group.

MP Kariyawasam emphasized that they couldn’t act recklessly on the issue at hand.Those who quit the SLPP parliamentary group, too, have strongly opposed the full implementation of the 13th Amendment. Pivithuru Hela Urumaya (PHU) leader Udaya Gammanpila, MP, compared the developing crisis here with Western project that divided Indonesia in the late 90s.Attorney-at-Law Gammanpila explained how Western countries exploited the economic crisis in Indonesia to compel Jakarta to grant independence to East Timor.

Addressing a public rally at Dehiwela on Feb. 02  in support of Nidahas Janatha Sandhanaya contesting March 09 Local Government polls, former Power and Energy Minister said that the challenge faced by Sri Lanka owing to the continuing balance of payments and debt crises was very much similar to the circumstances leading to East Timor independence.

The 13th Amendment would split Sri Lanka on ethnic lines, the Colombo District MP warned.The MP recalled how external powers created an environment that compelled Indonesian President Suharto to resign in May 1998 to pave the way for Megawati Setiawati Sukarnoputri to win the next presidential election. The MP said that Sukarnoputri granted independence to East Timor.

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