An Echelon Media Company
Tuesday August 16th, 2022

Government’s decision to award the Adani group the ECT terminal is positive

ECONOMYNEXT – President Gotabaya Rajapaksa has announced that the government will be entering into an agreement with the Adani Group based in India to offer them 49 per cent of the shares in a joint venture company. This joint venture will include Japanese government financing and will manage one of the terminals in Colombo port. The entry of Adani Group into Colombo port has been opposed by a wide coalition of organisations ranging from port workers and left political parties to nationalists and civil society groups. These groups have little in common with each other but on this particular issue, they have made common cause and even held joint protests together. The main thrust of their objections is that control over the East Terminal of Colombo port will pass into foreign hands and result in an erosion of Sri Lankan sovereignty.

The cause for alarm among the protesting groups may be fueled by the observation that one by one, the ports of Sri Lanka are being utilized by foreign powers. In particular, China has entered into Sri Lanka in a big way obtaining a 99-year lease in the Hambantota port that is constructed. The Hambantota port in its early period showed it was economically unviable in the absence of Chinese cooperation. The burden of debt repayment induced the previous government to enter into this agreement which may become unfavourable in terms of national sovereignty. There were protests at the time of the signing of that lease agreement too, though not as effective as the present protests regarding the change of management in Colombo port which is led by the very forces that helped to bring the present government into power.

In addition to the Hambantota port, control over the South Terminal in Colombo port and a section of the harbour has been given to China through one of its companies on a 35-year lease. In both cases, large Chinese investments have helped to upgrade Sri Lanka’s capacity to attract international shipping lines to make use of the port facilities. The Hambantota port, in particular, could benefit enormously from Chinese ships that traverse the Indian Ocean the Middle East and Africa. Instead of making refuelling stops elsewhere along the way, such as Singapore, they could now come to Hambantota. However, these investments would also come a Chinese presence that could cause concerns among international actors that have geopolitics in mind. It may be that these concerns are finding expression in the opposition to the Indian entry into Colombo port.

CRANE: ZPMC gantry cranes are already in use in Colombo.

Rational Analysis

It will not only be Sri Lankans who are concerned about the Chinese presence in the country’s ports. As Sri Lanka’s nearest neighbour, India too would have concerns, which are mirrored by other international powers such as Japan. It might be remembered that when Japan’s prime minister visited Sri Lanka in 2014, there was a diplomatic furore that a Chinese submarine entered Colombo port unannounced even to the Sri Lankan government and docked there. With its excellent relations with China that go back to the 1950s when the two countries signed a barter agreement exchanging rice for rubber, most Sri Lankans would tend to see such Chinese actions in a benign light. In recent years China has emerged as Sri Lanka’s largest donor and its assistance is much appreciated. However, India’s relations with China are more complex.

The two countries have massive trade links, but they have also gone to war with each other due to territorial disputes. Even at the present time Indian and Chinese troops are in a stand-off on their disputed Himalayan border. In this context, India would be concerned that the Chinese presence in Sri Lankan ports could eventually take the form of an overall strategy to encircle it and use this leverage to India’s disadvantage. Sri Lanka’s location at the bottom of the Asian continent gives it a strategic importance in the Indian Ocean that goes beyond any possible India-China rivalry. The recent visit of US Secretary of State to Sri Lanka included an acerbic exchange of words between the US and Chinese representatives on that occasion and an open call to Sri Lanka to take sides, or not to take sides. As a small actor in itself, Sri Lanka would have no interest in getting involved in international geopolitics and has a longstanding policy of non-alignment and friendship with all.

More than anyone else, President Gotabaya Rajapaksa would be aware of these geopolitical issues. As Defense Secretary during the years of war with the LTTE, he was a key member of the government team that obtained wide-ranging international support for prosecuting the war. Today the president’s key advisers include those with military backgrounds who have special expertise in geopolitical analysis and who have spent time in leading military academies in different parts of the world, including the US, China and India. This contrasts with the more parochial thinking of political, nationalist and even civil society groups who have come out in opposition to the agreement that the government has entered into with the Indian company to manage the Eastern Terminal of Colombo port.

President Gotabaya Rajapaksa holding talks with India’s External Affairs Minister S Jaishankar

Geopolitical Imperative

President Rajapaksa was elected to the presidency in the context of the security debacle of the Easter suicide bomb attacks and with the expectation that he would provide clear cut leadership in protecting the country’s national security without permitting partisan interests from becoming obstacles. In his meeting with the representatives of the trade unions opposing the handing of management of the Eastern Terminal to foreign hands, the president is reported to have said that geopolitics had also to be taken into account. As many as 23 trade unions representing the Ports Authority, the National Organisations collective and a number of civil organizations have joined the formation of a new national movement named the ‘Movement to protect the East Container Terminal’.

One of those political representatives at the meeting, leader of the Frontline Socialist Party (FSP), Pubudu Jayagoda is reported to have said, “When trade unions met President Gotabaya Rajapaksa on Wednesday (13), he told them about the broad geopolitical factors in play. This is reminiscent when the unions met former Prime Minister Ranil Wickremesinghe a few years back. The unions told Wickremesinghe what they told Rajapaksa––the ECT could be operated by Sri Lanka in a profitable manner. Wickremesinghe told the union representatives, ‘You are talking about the port, I am talking about geopolitics’.” However, former Prime Minister Wickremesinghe may not have had the necessary political power to ensure that his vision prevailed and failed to ensure the implementation of the agreement.

By explaining his decision in a straightforward manner, and carrying it out, President Rajapaksa has shown leadership in its constructive sense. By ensuring that India is given a presence in Sri Lanka’s most important port it will reassure our closest neighbour, as well as Japan which has been Sri Lanka’s most consistent international donor, that our national security interests and theirs are not in opposition to each other. Second, it takes cognizance of the reality that about two-thirds of Colombo port’s shipping is due to transhipment with India, and thereby ensures that this profitable business continues. Third, it will give Sri Lanka more leverage to negotiate with India regarding key concerns, which includes Indian support to Sri Lanka at international forums and in providing guarantees for the unity of the country in the face of possible future threats. Vindicating the need to ensure devolution of power to satisfy ethnic minority aspirations and permitting the burial of those who die of Covid remains to be done. (Colombo, January 19, 2021)
Edited By Arjuna Ranawana

Leave a Comment

Your email address will not be published.

Leave a Comment

Leave a Comment

Your email address will not be published.

Sri Lanka sovereign rating at SD but ISBs downgraded to ‘D’ by S&P

ECONOMYNEXT – Sri Lanka’s sovereign rating remains at Selective Default (SD), but the country’s sovereign bonds were downgraded to ‘D’ after missed interest payments, Standard and Poor’s, a rating agency said.

“The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs),” the S&P said.

“We do not expect the government to make the payments within 30 calendar days after their due dates.

“We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.”

Sri Lanka is still paying senior creditors with money coming from deferred payments from the Asian Clearing Union.

Sri Lanka started to borrow heavily in foreign bond markets from 2015 after battering its currency peg with extraordinary liquidity injections under ‘flexible inflation targeting and the country lost the ability to roll-over maturing rupee bonds at gross financing level.

From 2015 to 2019, the country had monetary stability only in 2017 and 2019 as the pegged exchange rate regime was shattered with liquidity injections to target an ‘output gap’.

However the targeting the output gap led to currency crises (balance of payment deficit) and growth fell as stabilization measures were slammed.

From 2020 to 2022 even more aggressive liquidity injections were made and taxes were also cut saying there was a ‘persistent output gap’ until all foreign reserves including borrowed reserves were lost and the the country defaulted in peacetime.

The International Monetary Fund gave technical assistance to Sri Lanka to calculate the output gap and also endorsed ‘flexible inflation targeting’, with overnight repo injections, term repo injections, outright purchase of bond, despite having a reserve collecting peg.

On April 12, 2022 Sri Lanka defaulted despite being at peace.

The full statement is reproduced below:

Sri Lanka Bonds Downgraded To ‘D’ After Missed Payments; Sovereign Ratings Affirmed

Overview

The Sri Lanka government remains in default on some foreign currency obligations, including international sovereign bonds (ISBs).

We do not expect the government to make the payments within 30 calendar days after their due dates.

We lowered the ratings on the affected bonds to ‘D’, following missed interest payments due on June 3, June 28, and July 18, and a missed principal payment due July 25.

We affirmed our ‘SD/SD’ foreign currency and ‘CCC-/C’ local currency ratings on Sri Lanka. The outlook on the long-term local currency rating is negative.

Rating Action

On Aug. 15, 2022, S&P Global Ratings affirmed its ‘SD’ long-term and ‘SD’ short-term foreign currency sovereign ratings on Sri Lanka. At the same time, we affirmed our ‘CCC-‘ long-term and ‘C’ short-term local currency sovereign ratings. The outlook on the long-term local currency rating remains negative.

In addition, we lowered to ‘D’ from ‘CC’ the issue ratings on the following bonds with missed coupon or principal payments:

US$650 million, 6.125% bonds due June 3, 2025.

US$1.0 billion, 6.825% bonds due July 18, 2026.

US$1.0 billion, 5.875% bonds due July 25, 2022.

US$500 million, 6.35% bonds due June 28, 2024.

Our transfer and convertibility assessment at ‘CC’ is unchanged.

Outlook

Our foreign currency rating on Sri Lanka is ‘SD’ (selective default). We do not assign outlooks to ‘SD’ ratings because they express a condition and not a forward-looking opinion of default probability.

The negative outlook on the local currency rating reflects the high risk to commercial debt repayments over the next 12 months in the context of Sri Lanka’s economic, external, and fiscal pressures.

Downside scenario

We could lower the local currency ratings if there are indications of nonpayment or restructuring of Sri Lankan rupee-denominated obligations.

Upside scenario

We could revise the outlook to stable or raise the local currency ratings if we perceive that the likelihood of the government’s local currency debt being excluded from any debt restructuring has increased. This could be the case if, for example, the government receives significant donor funding, which gives it some time to implement immediate and transformative reforms.

We would raise our long-term foreign currency sovereign credit rating upon completion of the government’s bond restructuring. The rating would reflect Sri Lanka’s post-restructuring creditworthiness. Our post-restructuring ratings tend to be in the ‘CCC’ or low ‘B’ categories, depending on the sovereign’s new debt structure and capacity to support that debt.

Rationale

Sri Lanka’s external public debt moratorium prevents payment of interest and principal obligations due on the government’s ISBs. As such, interest payments due June 3, June 28, and July 18 on its ISBs maturing 2024, 2025, and 2026, and the principal payment on its July 25, 2022, ISB, would have been affected. Following the missed payments, and given our expectation that payment will not be made within 30 calendar days of the due date, we have lowered the issue ratings on these bonds to ‘D’ (default).

Overdue payments now include the following bonds:

US$1.0 billion, 5.875% bonds due 2022.

US$1.25 billion, 5.75% bonds due 2023.

US$500 million, 6.35% bonds due 2024.

US$1.5 billion, 6.85% bonds due 2025.

US$650 million, 6.125% bonds due 2025.

US$1.0 billion, 6.825% bonds due 2026.

US$1.5 billion, 6.20% bonds due 2027.

US$1.25 billion, 6.75% bonds due 2028.

Continue Reading

Sri Lanka rupee guidance peg edges up; market sees dull trade in govt securities 

ECONOMYNEXT – Sri Lanka’s rupee guidance peg on interbank spot trading strengthened by seven cents while yields on Treasury bills and bonds remained dull on Monday (15) with only a handful of maturities quoted ahead of the central bank’s monetary policy rates later this week, dealers said.

“There was nothing in the market. It was dull today,” a market dealer said.

The central bank will announce its latest key monetary policy rates on Thursday, August 18.

A bond maturing on 01. 06. 2025 closed at at 27.50/28.50 percent on Monday, slightly down from 27.30/28.30 percent on Friday.

The three-month T-bill closed flat at 26.00/27.00 percent on Monday.

Sri Lanka’s central bank announced a guidance peg for interbank transactions strengthened by 7 cents to 360.92 rupees against the US dollar on Monday from 360.85 rupees.

Data showed that commercial banks offered dollars for telegraphic transfers between 369.70 and 370.00 for small transactions. (Colombo/ Aug 15/2022)

Continue Reading

Sri Lanka stocks rally continues for 12th straight session on political stability hopes 

The main index fell for the 4th consecutive session

ECONOMYNEXT – Sri Lanka stocks gained for the 12th consecutive session on Monday (15) ending at their highest in more than four months pushed by retail shares amid signs of political stability after months of protests, dealers said.

The market generated 5.8 billion rupees in turnover, nearly twice of this year’s average daily turnover of 3.11 billion rupees.

The main All Share Price Index (ASPI) rose 1.82% or 164.04 points to 9,191.52, its highest since March 30. The index has risen 19.6% in the last 12 sessions.

“We are seeing a lot of volatility in the market today due to profit taking in the key shares that gained in the last 11 sessions,” a market analyst said.

“Profit-taking also returned after the CSE (Colombo Stock Exchange) published the last set of June reports that showed some counters having done very while some not so much, therefore, there is a significant reaction for that.”

In the last few sessions, the market was mostly driven by Lanka IOC and the plantation sector.

However, ahead of the fuel price revision, LIOC moved to red.

“There was a bit of profit taking on anticipation of price cuts. However, unless fuel prices are cut sharply, LIOC will continue to move,” the analyst said.

At the start of the month, CPC cut fuel prices by 10 rupees based on the price formula.

Globally, crude oil prices have dropped hence there is strong speculation that fuel prices will be cut further.

Last week, Sri Lanka announced a 75 percent electricity tariff hike.

Investors previously feared the move would drag the market down due to possible higher costs for manufacturing firms.

However, the political stability after four months of protest is seen as the catalyst for the market gain, dealers said.

The government also tabled an interim budget last week, revising the budget presented last year as the country is going through an unprecedented economic crisis amid plans on a four-year IMF loan programme, debt restructuring, fiscal reforms, and dealing with loss-making state-owned enterprises.

Sri Lanka already declared sovereign debt default on April 12 this year and failed to pay its first sovereign debt in May amid a deepening economic crisis which later turned into a political crisis and led to a change in the president, cabinet, and government.

The more liquid S&P SL20 index moved up, closing at 0.82% or 25.28 points stronger at 3,097.30.

Sri Lanka is facing its worst fuel and economic crisis in its post-independence era and the economy is expected to contract 7 percent this year.

The main ASPI gained 18.8 percent in August so far after gaining 5.3 percent in July. It lost 9.3 percent in June, 23 percent in April, and 14.5 percent in March.

The market index has lost 24.8 percent so far this year after being one of the world’s best stock markets with an 80 percent return last year when large volumes of money were printed.

Sri Lanka’s sovereign debt default on April 12 has already led the country to be rated with restricted/selective default rating by rating agencies, which has weighed on investor sentiment.

Net foreign outflow was 117 million rupees on Monday while the total net foreign outflow so far this year is 1.3 billion rupees.

Investors are also concerned over the steep fall of the rupee from 203 to 370 levels so far in 2022.

Ceylinco Insurance which pushed the ASPI, closed 11.9 percent up at 2,143.2 rupees a share. Browns Investment closed 8.5 percent up at 8.9 rupees a share, and John Keells Holdings gained 2.5 percent to 129.7 rupees. (Colombo/Aug15/2022)

Continue Reading