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Monday December 5th, 2022

Fitch downgrades Sri Lanka Insurance to CCC+ on sovereign rating cut

ECONOMYNEXT – Fitch Ratings has downgraded state-run Sri Lanka Insurance Corporations’ Insurer Financial Strength rating to ‘CCC+’from ‘B’ after the sovereign rating was downgraded earlier.

“Fitch believes the sovereign’s downgrade underscores SLIC’s investment risks due to its high exposure to sovereign and sovereign-related investments,” the rating agency said.

“Fitch, under our credit-factor scoring guidelines, scores the insurer’s investment and asset risk at ‘cc’ on the international rating scale due to its high ‘risky-asset’ exposure.

“SLIC’s Fitch-calculated risky-asset ratio was 331% at end-1H20, and we estimate the ratio to have increased to 487% on a pro forma basis following the sovereign downgrade.

SLIC’s rating continues to reflect its ‘Favourable’ business profile, and a capital position and financial performance better than that of the domestic insurance industry.

The full statement is reproduced below:

Fitch Downgrades Sri Lanka Insurance’s IFS to ‘CCC+’ on Sovereign Downgrade

Wed 09 Dec, 2020 – 03:51 ET

Fitch Ratings – Colombo/Sydney – 09 Dec 2020: Fitch Ratings has downgraded Sri Lanka Insurance Corporation Limited’s (SLIC) Insurer Financial Strength (IFS) Rating to ‘CCC+’ from ‘B’. Fitch typically does not apply Outlooks to ratings in the ‘CCC’ category or below. SLIC’s National IFS Rating was not covered in this review.

KEY RATING DRIVERS

The rating action follows the downgrade of the Sri Lankan sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020, which heightened SLIC’s investment and asset risks on the international rating scale, and increased the pressure on the operating environment and the insurer’s business profile.

SLIC’s rating continues to reflect its ‘Favourable’ business profile, and a capital position and financial performance better than that of the domestic insurance industry. (See our commentary on the sovereign downgrade, “Fitch Downgrades Sri Lanka to ‘CCC’, at www.fitchratings.com/site/pr/10144958.)

Fitch believes the sovereign’s downgrade underscores SLIC’s investment risks due to its high exposure to sovereign and sovereign-related investments. Fitch, under our credit-factor scoring guidelines, scores the insurer’s investment and asset risk at ‘cc’ on the international rating scale due to its high ‘risky-asset’ exposure. SLIC’s Fitch-calculated risky-asset ratio was 331% at end-1H20, and we estimate the ratio to have increased to 487% on a pro forma basis following the sovereign downgrade.

We lowered the country’s Industry Profile and Operating Environment score after the sovereign rating downgrade, resulting in the lowering of SLIC’s business profile score under our credit-factor scoring guidelines to ‘b-‘ from ‘b+’ on the international rating scale.

Fitch continues to regard SLIC’s business profile as ‘Favourable’ compared with that of other Sri Lankan insurance companies due to its leading business franchise, participation in well-diversified and stable business lines, and large domestic operating scale.

SLIC’s regulatory risk-based capital ratios of 451% for its life and 203% for its non-life segments at end-1H20 were well above the industry average and the 120% regulatory minimum.

Fitch evaluated SLIC’s capital score, measured by the Fitch Prism Model, at ‘Adequate’ on a consolidated group basis at end-2019.

We expect the insurer’s capital buffers, strengthened partly by its unallocated participating surpluses, to mitigate the impact from any potential investment losses stemming from volatile financial markets as a result of the coronavirus pandemic, although the unallocated participating surpluses declined significantly in 1H20 due to lower market interest rates.

Fitch believes the slowdown in economic activity due to the pandemic will hamper the industry’s new business growth.

We expect new business generation for life insurance to be subdued in the near term as most insurers use agency networks that rely on human interaction for distribution. We expect non-life business growth to slow in light of the government’s restriction on the import of motor vehicles to control currency depreciation.

Fitch expects the potential pressure on earnings from rising price competition, fueled by constrained business growth and softer investment yields, to be somewhat mitigated by lower claims from motor insurance lines due to a drop in traffic accidents following the implementation of pandemic-related travel restrictions. SLIC has consistently maintained its non-life combined ratio below 100% (1H20: 96%; 2019: 95%) for the past five years, buoyed by its scale advantages and prudent underwriting practices.

RATING SENSITIVITIES

The IFS Rating remains sensitive to any material change in Fitch’s rating case assumptions on the pandemic. Periodic updates to our assumptions are possible in light of the rapid pace of changes in government action in response to the pandemic, and the speed with which new information is available on the medical aspects of the outbreak.
Factors that could, individually or collectively, lead to negative rating action/downgrade:

– A material adverse change in Fitch’s rating assumptions on the coronavirus impact.

– A further increase in SLIC’s investment and asset risks on a sustained basis.

– Deterioration in the Fitch Prism Model score to well below ‘Somewhat
Weak’ for a sustained period.

– Significant deterioration in financial performance and earnings for a sustained period.

– Significant weakening in SLIC’s business profile.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– A material positive change in Fitch’s rating assumptions on the coronavirus impact.

– A positive rating action is prefaced by Fitch’s ability to reliably forecast the
impact of the pandemic on the financial profile of both the Sri Lankan insurance industry and SLIC.

– Significant reduction in SLIC’s investment and asset risks on a sustained basis.

– Sustained maintenance of SLIC’s ‘Favourable’ business profile; and

– Maintenance of the Fitch Prism Model score well into the ‘Somewhat Weak’
level on a sustained basis.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.

The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by

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Paris Club proposes 10-year moratorium on Sri Lanka debt, 15 years of debt restructuring

ECONOMYNEXT — The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis, India’s The Hindustan Times reported.

While the Paris Club has yet to formally reach out to India and China, Colombo has yet to initiate a formal dialogue with the Xi Jinping regime, the newspaper reported on Saturday December 03, inferring that the chances of the International Monetary Fund (IMF) approving its 2.9 billion dollar extended fund facility for Sri Lanka in December now ranges from very low to nonexistent.

“This means that Sri Lanka will have to wait for the March IMF meeting of the IMF before any aid is extended by the Bretton Woods institution,” the newspaper reported.

“Fact is that for Sri Lanka to revive, creditors will have to take a huge hair cut with Paris Club clearly hinting that global south should also take the same cut as global north notwithstanding the inequitable distribution of wealth. In the meantime, as Colombo is still to get its act together and initiate a dialogue and debt reconciliation with China, it will need bridge funding to sustain the next three month before the IMF executive board meeting in March 2023. Clearly, things will get much worse for Sri Lanka before they get any better—both economically and politically,” the report said. (Colombo/Dec04/2022)

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Sri Lanka’s Ceylon tea prices up amid low volumes

ECONOMYNEXT – Sri Lanka tea prices picked up at the last auction in November amid low volumes, brokers said.

“Auction offerings continued to record a further decline and totalled 4.2 million Kilograms, of which Ex-Estate offerings comprised of 0.6 million Kilograms. There was good demand,” Forbes and Walker Tea brokers said.

“In the Ex-Estate catalogues, overall quality of teas showed no appreciable change. Here again, there was good demand in the backdrop of extremely low volumes.”

High Growns

BOP Best Westerns were firm to 50 rupees per kg dearer. Below best and plainer types were Rs.50/- per kg easier on last.

Nuwara Eliya’s were firm.

BOPF Best Westerns were firm to selectively dearer. Below best and plainer teas declined by 50 rupees per kg.

Uva/Uda Pussellawas’ were generally firm and price variances were often reflective of quality with the exception of Select Best Uva BOPF’s which were firm and up to 50 rupees per kilogram dearer.

CTC teas, in general, were mostly firm.

“Most regular buyers were active, with perhaps a slightly more forceful trend from the local trade,” brokers said.

Corresponding OP1’s met with improved demand. Well-made OP/OPA’s in general were fully firm, whilst the Below Best varieties and poorer sorts met with improved demand. PEK/PEK1’s, in general, were fully firm to selectively dearer.

In the Tippy catalogues, well-made FBOP/FF1’s sold around last levels, whilst the cleaner Below Best and cleaner teas at the bottom appreciated. Balance too were dearer to a lesser extent.

In the Premium catalogues, very Tippy teas continued to attract good demand. Best were firm to selectively dearer, whilst the Below Best and cleaner teas at the bottom appreciated

Low Growns

Low Growns comprised 1.8 million Kilograms. Market met with improved demand, in general.

In the Leafy & Semi Leafy catalogues, select Best BOP1/OP1’s were fully firm, whilst the Below Best/bolder BOP1’s were barely steady.

Low-grown teas, farmed mainly by smallholders and exported to the Middle East and Central Asia, are the most sought-after and expensive Ceylon Teas.

Low-grown CTC prices have gained this week to 982.80 per kilogram this week from 934.76 per kilogram last week.

Few Select best BOP1s maintained, whilst best and below best were irregularly lower. Poorer types maintained.

BOPF’s in general, firm market.

FBOPF/FBOPF1’s select best and best increased in value, whilst the below best and bottom held firm.

Selected best BOP1’s maintained, whilst best and below best were irregularly lower.Poorer types maintained.

OP1’s selects best together with best and below best were firm to dearer. Poorer sorts were fully firm.

Medium Growns

BOPF’s, select best gained by 50 rupees per kilogram. Others maintained.

BOP1’s select best dearer by 100 rupees per kg whilst all others moved up by 50 rupees per kg.

OP1: select best gained by 100 rupees per kg whilst all others dearer by 100 rupees per kg.

OP/OPA’s in general, dearer by 50 rupees per kg whilst the poorer sorts were firm.

PEK’s Select best gained by 50 rupees per kg whilst all others maintained. PEK1: In general, dearer by 50 rupees per kg. (Colombo/Dec 04/2022)

 

 

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Sri Lanka Ports Authority East Terminal contractor paid: Minister

ECONOMYNEXT – Sri Lanka’s Ports Authority had paid a deposit for a gantry crane and made the required payment for the contractor to complete building the East Container Terminal, Minister Nimal Siripala De Silva said.

The East Container Terminal, a part of which is already built is being completed as a fully SLPA owned terminal at a cost of 480 million dollars Ports and Shipping Minister de Silva said.

“ECT we are funding with money available in the ports authority,” he said.

“Up to now we have paid an advance for the gantry crane. And for the construction we have paid all the money agreed with the contractor. So that is going on well.”

Sri Lanka is undergoing the worst currency crisis in the history of the island’s soft-pegged (flexible exchange rate) central bank which has created difficulties in funding the project.

“Every penny we collect as dollars we are keeping them separately and utilizing that for the Eastern Terminal work,” Minister de Silva said.

“We are confident that the ECT will be completed within the envisaged time. It is a difficult task in view of the dollar problem.

Banks were also not releasing the dollar deposits of the SLPA earlier but are now doing so, he said.

“Our deposits in banks they have utilized for urgent other national purposes,” he said.

“So they are releasing that money slowly. I am happy that they are releasing that money little by little. So with that we will be able to manage that.”

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