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China to play central role in supporting ‘CCC’ rated Sri Lanka, Maldives, Laos: Fitch

ECONOMYNEXT – China is expected to play a major role in providing financial support for ‘CCC’ rated borrowers, Sri Lanka, Maldives and Laos, who owe large volumes of money to Chinese banks, Fitch Ratings said in a report.

India was also helping Maldives in a big way and had give a swap which had been settled pending a program with the International Monetary Fund.

“We expect bilateral credit to play a central role in providing financing support to Laos, the Maldives and Sri Lanka,” Fitch Ratings said in a report.

“This partly reflects the geopolitical strategic importance of these countries amid regional rivalry between India and China.

“China’s policies on extending debt relief or permitting debt rollovers may play a significant role in the debt sustainability dynamics of the three ‘CCC’ APAC sovereigns.

“In addition to China’s official support, Chinese state-owned banks are major commercial creditors in these markets.”

In Laos around half of external debt falling due was owed to China. The People’s Bank of China has already given Laos a swapline.

“The new government in Laos has indicated a desire to pursue equity, rather than debt financing, in the future, in which China is likely to play a crucial role,” the report said.

Analysts say Laos has monetary instability, while the Maldives has the best monetary authority among the lot.

All three CCC rated economies are expected to pick up in 2020.

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“Economic recoveryis unlikely, on its own, to restore the creditworthiness of ‘CCC’ APAC sovereigns–Laos, the Maldives and Sri Lanka –to pre-pandemic levels,” Fitch said.
“The potential for heightened external liquidity strains leading to increased signs of default poses the most likely source of downward rating pressure for ‘CCC’ APAC sovereigns :

“External financing support from India may also be important,” the rating agency said. “The Indian government provided 250 million dollars of pandemic relief to the Maldives in September 2020, for example.”

In November the Reserve Bank of India gave Maldives 400 million dollar swap line. Maldives has an ongoing IMF program and has a received broad support from creditors including the Middle East.

Sri Lanka was also given a swap which was settled in February pending an IMF deal. Entry to the Debt Service Suspension Initiative of the G20 also required a IMF deal.

Sri Lanka did not qualify for DSSI. But there was also another program going beyond DSSI.

“Countries with IMF financing arrangements may benefit from a broader range of funding options, including access to funding from other multilaterals,” Fitch said

“Sovereigns would also need to enter an IMF programme to access the Common Framework for Debt Treatments Beyond the DSSI.”

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