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Tuesday November 29th, 2022

Fitch downgrades SriLankan Airlines’ govt-guaranteed bonds to ‘B’

ECONOMYNEXT – Fitch Ratings said it has downgraded the rating on SriLankan Airlines Limited’s (SLA) USD175 million government-guaranteed bonds due in June 2019 to ‘B’ from ‘B+’.

The move follows the downgrade of Sri Lanka’s sovereign rating to ‘B’ with a Stable Outlook, a statement said.

The national carrier’s bonds are rated at the same level as its parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state.

The full Fitch Ratings statement follows:

Fitch Ratings – Colombo – 05 December 2018: Fitch Ratings has downgraded the rating on SriLankan Airlines Limited’s (SLA) USD175 million government-guaranteed bonds due in June 2019 to ‘B’ from ‘B+’.

This follows the downgrade of Sri Lanka’s Long-Term Foreign and Local-Currency Issuer Default Ratings to ‘B’ with a Stable Outlook (see ‘Fitch Downgrades Sri Lanka to ‘B’; Outlook Stable’, dated 3 December 2018).

The national carrier’s bonds are rated at the same level as SLA’s parent, the state of Sri Lanka, due to the unconditional and irrevocable guarantee provided by the state.

The Sri Lankan government held 99.5% of SLA at end-2017 through direct and indirect holdings

KEY RATING DRIVERS

Heightened Refinancing Risk: The downgrade of the sovereign reflects heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation as a result of an ongoing political crisis. Fitch believes the ongoing political upheaval, which has disrupted the normal functioning of parliament, exacerbates the country’s external financing risks, which are already heightened by the tightening of global monetary conditions amid a heavy external debt repayment schedule between 2019 and 2022. Fitch also expects fiscal slippages as the current political climate is likely to lead to delays in setting policy priorities and to disruption in progress on future reforms.

DERIVATION SUMMARY

Fitch has rated SLA’s US dollar-denominated bonds at the same level as the sovereign due to the unconditional and irrevocable guarantee provided by the government. The rating is not derived from its issuer’s standalone credit profile and thus is not comparable to its industry peers.

RATING SENSITIVITIES

The main factors that individually, or collectively, could trigger a positive rating action are

– An upgrade of the sovereign rating

The main factors that, individually or collectively, could trigger negative rating action are:

– A downgrade of the sovereign rating

For the sovereign rating of Sri Lanka, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 3 December 2018

The main factors that individually, or collectively, could trigger a positive rating action are:

– Improvement in external finances supported by higher non-debt inflows, or a reduction in external sovereign refinancing risks from an improved liability profile

– Improved policy coherence and credibility

– Stronger public finances underpinned by a credible medium-term fiscal strategy

The main factors that, individually or collectively, could trigger negative rating action are:

– Further increases in external funding stresses that threaten the ability to repay external debt

– Continued political uncertainty that contributes to a loss of investor confidence, possibly affecting the macroeconomic outlook

– A deterioration in policy coherence and credibility that leads to an increase in general government debt and deficit levels
(COLOMBO, 05 December 2018)
 

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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a twitter.com message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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Sri Lanka new CB law to cabinet soon as IMF prior action

ECONOMYNEXT – Sri Lanka’s new central bank law will be submitted to the cabinet as a prior action of International Monetary Fund with clauses to improve governance and legalize ‘flexible’ inflation targeting, Central Bank Governor Nandalal Weerasinghe said.

Under the new law members of the monetary board will be appointed by the country’s Constitutional Council replacing the current system of the Finance Minister making appointments.

“It will be a bipartisan approach,” Governor Weerasinghe told an investor forum organized by CT CLSA Securities, Colombo-based brokerage.

“The central bank’s ability to finance the budget deficit will be taken out. Thirdly the flexible inflation targeting regime will be recognized in the law as the framework.”

The law will also make macro-prudential surveillance formally under the bank.

There will be two governing boards, one for the management of the agency and one to conduct monetary policy.

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