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Sunday September 24th, 2023

Fitch downgrades Sri Lanka DDR bonds to ‘Default’, rupee rating to ‘RD’

ECONOMYNEXT – Fitch Ratings said it has downgraded the rating on several bonds involved in a domestic debt restructuring to default, while the long-term local currency rating was downgraded to ‘Restricted Default’.

“The ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’ while its other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’,” the rating agency said.

Fitch downgraded Sri Lanka’s foreign currency rating to restricted default when the country defaulted on its sovereign and bilateral creditors last year.

The full statement is reproduced below:

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

Thu 14 Sep, 2023 – 2:08 PM ET

Fitch Ratings – Hong Kong – 14 Sep 2023: Fitch Ratings has downgraded Sri Lanka’s Long-Term Local-Currency (LTLFC) Issuer Default Rating (IDR) to ‘RD’ (Restricted Default) from ‘C’.

The ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’ while its other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’.

The Long-Term Foreign-Currency (LTFC) IDR has been affirmed at ‘RD’, and the ratings on Sri Lanka’s foreign-currency bonds have been affirmed at ‘D’.

All issue ratings have subsequently been withdrawn.

Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

A full list of rating actions is detailed below.

Fitch has withdrawn the issue ratings of Sri Lanka’s foreign and local-currency bonds as these are no longer considered to be relevant to the agency’s coverage.

Distressed Debt Exchange: The downgrade of Sri Lanka’s LTLC IDR reflects the partial completion of an exchange of Sri Lanka’s T-bonds on 14 September as part of a broader domestic debt optimisation (DDO) launched in July 2023. The DDO also includes conversion of T-bills held by the Central Bank of Sri Lanka (CBSL) into treasury bonds (T-bonds), which has not yet been completed.

In Fitch’s view, the exchange of T-bonds constitutes a distressed debt exchange (DDE) under the agency’s criteria, given that the maturity extension of the tendered bonds represents a material reduction in terms versus the original contractual terms, and given that the exchange is needed to avoid a traditional payment default.

Reduction in Terms: Eligible bonds for which tenders were received and accepted have been exchanged into 12 new instruments of equal size and the same aggregate principal amount, maturing between 2027 and 2038. Accepted tenders reached about 37% of the outstanding principal amount of eligible bonds outstanding as of 28 June 2023. Accepted tenders were predominantly by superannuation funds, which will face higher tax rates on income from T-bonds if they did not meet a participation threshold.

Local-Currency Debt Service Continuing: Fitch believes that Sri Lanka has continued to service the T-bonds throughout the DDO process, and that T-bonds not tendered in the exchange will continue to be serviced as per their original terms, including but not limited to the entirety of the 12 series of T-bonds (out of 61 eligible series) for which no valid tenders were received. Four of these 12 series were rated by Fitch and were affirmed at ‘C’ prior to withdrawal.

Local-Currency Restructuring Incomplete: Under Fitch’s rating criteria, the LTLC IDR will remain in ‘RD’ until the debt exchange is completed in its entirety. Fitch deems the process incomplete, as the exchange of T-bills held by CBSL is still pending. Fitch regards the T-bills as public debt securities, and they are also held by private investors.

Foreign-Currency IDR in Default: The sovereign remains in default on foreign-currency obligations and has initiated a debt restructuring with official and private external creditors. The Ministry of Finance had 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 loans and credit facilities with commercial banks and institutional lenders.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Sri Lanka has a medium WBGI ranking in the 45th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

ESG – Creditor Rights: Sri Lanka has an ESG Relevance Score of ‘5’ for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The affirmation of Sri Lanka’s LTFC IDR at ‘RD’ and downgrade of LTLC IDR to ‘RD’ reflect a default event.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

– The Long-Term IDRs are at the lowest level, and cannot be downgraded further

– The Short-Term Local-Currency IDR will be downgraded to ‘RD’ on the completion of the exchange of T-bills

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

– Following completion of the debt exchange with CBSL, Fitch will assign Sri Lanka’s LTLC IDR based on a forward-looking assessment of its willingness and capacity to honour its local-currency debt

– For the LTFC IDR, completion of the foreign-currency commercial debt restructuring that Fitch judges to have normalised relationship with private-sector creditors may result in an upgrade


In accordance with the rating criteria for ratings in the ‘CCC’ range and below, Fitch’s sovereign rating committee has not used the SRM and QO to explain the ratings, which are instead guided by the agency’s rating definitions.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LTFC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the LTFC IDR, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.


The Country Ceiling for Sri Lanka is ‘B-‘. For sovereigns rated ‘CCC+’ or below, Fitch assumes a starting point of ‘CCC+’ for determining the Country Ceiling. Fitch’s Country Ceiling Model produced a starting point uplift of zero notches. Fitch’s rating committee applied a +1 notch qualitative adjustment to this, under the balance of payments restrictions pillar, reflecting that the private sector has not been prevented or significantly impeded from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch does not assign Country Ceilings below ‘CCC+’, and only assigns a Country Ceiling of ‘CCC+’ in the event that transfer and convertibility risk has materialised and is affecting the vast majority of economic sectors and asset classes.

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Sri Lanka India industrial zone around Trinco, maritime links mooted

ECONOMYNEXT – Sri Lanka’s Ports Minister Nimal Siripala de Silva had highlighted the desire of both the Governments to work closely to develop the industrial zone at Trincomalee, after accepting an invitation to participate in a maritime summit.

The Global Maritime India Summit (GMIS) will be held in India from October 17-19, 2023 at Mumbai where Sri Lanka has been invited at a partner country.

At a curtain raiser event on September 22, India’s High Commissioner in Colombo, Gopal Baglay had said both countries were working on enhancing sea connectivity according to a vision document launched during a recent visit of the President of Sri Lanka to India.

Minister de Silva will lead a delegation from Sri Lanka to the summit.

Secretary to the Ministry of Ports, Shipping and Waterways, Government of India, T K Ramachandran said the Global Maritime India Summit aims strengthen the Indian maritime economy by promoting global and regional partnerships and facilitating investments.

The event will give an opportunity to the Government of Sri Lanka to attracting greater investment from India in development of its maritime infrastructure, Ramachandran said.

It will also facilitate greater business to business interactions. (Colombo/Sept24/2023)

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Sri Lanka brings back import para tariff on milk

ECONOMYNEXT – Sri Lanka has brought back an import para tariff called the Ports and Airports Levy, to several grades of milk powder.

Milk powder has been removed from a list of PAL exemptions, making them liable for a 10 percent tax.

The PAL para tariffs are also a contentious issue in terms of export competitiveness, and the government has previously given undertakings that they will be eliminated.

Trade freedoms of the poor figure in an IMF/World bank reform program with the governments.

Milk is a protein rich food, in a country where children of poor families are facing stunting and malnutrition.

Economic nationalism is seen at high levels in food, with several businessmen are pushing for trade protection, amid an overall autarkist (self-sufficiency) ideology, going directly against policies followed in East Asia, which the same as hold up as examples.

Sri Lanka keeps dairy product prices up ostensibly to bring profits to a domestic dairy company and farmers.

Sri Lanka also keeps maize prices up, ostensibly to give profits to farmers and collectors. (Colombo/Sept22/2023)

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Sri Lanka govt warns liquor manufacturers: pay defaulted tax or lose licence

ECONOMYNEXT – Sri Lanka government which is struggling to raise the state revenue despite   higher taxes, has warned liquor manufacturers to pay defaulted taxes or lose their licence.

The government is now getting tough with past tax defaulters amid concerns over falling short of this year’s revenue target agreed with the International Monetary Fun (IMF).

“Liquor manufacturing firms owe us 660 crore rupees (6.6 billion rupees),” Siyambalapitiya told  reporters on Thursday (21).

“Most of this or around a third is the only excise tax amount to be paid. The rest is penalty. If a liquor manufacturer does not pay on time, we impose a penalty of 3 percent per month This means 36 percent (penalty) per annum,” he said.

“We have given them deadline to repay the basic excise taxes. If they don’t pay, we will cancel their licence.”

President Ranil Wickremesinghe’s government committed an ambitious revenue target among many other reforms to the International Monetary Fund (IMF) in return to a $3 billion loan package.

However, the revenue could face a short fall of 100 billion rupees, State Finance Minister Ranjith Siyambalapitiya has said.

A new Central Bank Act also has legally prevented the government of printing money at its discretion as  in the past.  (Colombo/September 24/2023)

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