Repayment bunching raises Sri Lankaâ€™s debt rollover risks: Moodyâ€™s
ECONOMYNEXT – Despite a recent increase in foreign exchange reserves, Sri Lanka’s reserve coverage of external debt obligations remains low, with a bunching up of repayments due from 2019 exposing it to external financing risk, Moody’s rating agency said.
Moody’s Investors Service said Sri Lanka, which is rated B1 negative, has several large external debt repayments due between 2019 and 2022.
“The bunching of these future external liabilities, which will average $3.6 billion per year, raises rollover and external vulnerability risks,” it said in a new report on the government of Sri Lanka credit profile.
“Sri Lanka’s significant borrowing requirements and heavy reliance on external and foreign-currency funding expose the sovereign to material liquidity and external financing risk, which weighs on the sovereign’s credit profile,” the report said
Moody’s said that despite a recent increase in foreign currency reserves, reserve adequacy remains low.
“Unless reserves rise still further, reserve coverage will weaken and external vulnerability will increase from 2019 when large international debt repayments are due,” it said.
Reforms that continue to advance fiscal consolidation and exchange rate flexibility, along with implementation of an effective external liability management strategy, would mitigate external risks and help support Sri Lanka’s credit profile, the rating agency said.
Moody’s assesses Sri Lanka’s external vulnerability as "Moderate", reflecting its view that sudden shifts in external conditions could weaken the sovereign’s credit profile.
“This external vulnerability stems from the structure of the country’s government debt, with large shares of external financing and foreign currency debt combining to heighten the government’s susceptibility to changes in financing conditions,” the report said.
As of 2016, total external debt (local and foreign currency external debt of combined public and private sectors) was about $47 billion (about 57% of GDP), of which about 68% was public sector debt.
The government’s foreign currency-denominated debt was about 43% of total general government debt in 2016 and about 34% of GDP.
Moody’s notes that Sri Lanka’s foreign currency reserves fell to a low of $4.1 billion in April 2017 from a peak of just over $8.1 billion in August 2014, but by August 2017, reserves had been rebuilt to $6.7 billion.
The debt-financing of Sri Lanka’s persistent current account deficits adds to future external financing needs, Moody’s also said.
Sri Lanka’s current account deficits, at 2.4% of GDP in 2016, are driven by large structural trade deficits and add to external financing requirements.
Annual net foreign direct investment (FDI), which was 1.2% of GDP in 2016, does not fully fund the deficit.
“Hence the current account deficit will continue to be partly financed through debt inflows, leading to further accumulation of debt liabilities,” the rating agency said.
(COLOMBO, October 17, 2017)