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Thursday April 18th, 2024

Sri Lanka 2021 revenues unlikely, bleaker fiscal outlook may hurt $4bn re-financing: Moody’s

ECONOMYNEXT – Sri Lanka is unlikely to get targeted revenues in 2021, with activity hit by import controls and worse than expected outlook for fiscal consolidation is likely to make it more difficult to re-finance 4 billion US dollars of debt in 2020, Moody’s a rating agency said.

“On the revenue side, the budgeted 28 percent increase in government revenue compared to 2020, largely stemming from robust growth in taxes on goods and services, and external trade, is unlikely to be achieved,” Moody’s said.

“Domestic demand is also likely to remain sluggish given still-subdued business and consumer confidence, and ongoing import restrictions affecting industries such as construction and manufacturing. Economic boost from budget will be limited.”

Sri Lanka revenues have fallen from around 14.1 percent of gross domestic product in 2016 to 9.5 percent in 2020 amid slow growth and December 2019 value added tax cuts, which the government wants to keep for five years, Moody’s said.

Sri Lanka was targeting a deficit of 8.8 percent of gross domestic product in 2021, against controversially adjusted 7.9 percent deficit for 2020. By 2025 a 4 percent deficit was forecasted and a 75.5 percent debt to GDP ratio.

“We forecast a similar gap for 2021, but for the deficit to remain above 8 percent of GDP through 2023 in light of persistently adverse fiscal dynamics and a slow economic recovery,” the rating agency said.

“As such, we expect Sri Lanka’s debt burden to increase to around 100 percent of GDP over 2020-21, above the Caa-rated median of 88 percent of GDP, and only begin to gradually decline in subsequent years.”

Moody’s downgraded Sri Lanka to Caa1 (CCC+ equivalent) in 2020.

If deficit reduction is worse than expected, it may be more difficult to repay debt in 2021, the rating agency said.

“A bleaker outlook for fiscal consolidation is likely to continue to challenge the government’s ability to raise financing for upcoming debt obligations and narrow annual borrowing needs, which in 2021, externally, amount to approximately $4 billion,” Moody’s said.

“Borrowing needs will stay elevated through 2025, including a large portion of maturing international sovereign bonds (see exhibit).

“Elevated repayment risks will continue to raise pressure on the government’s external and liquidity position as the recovery in major sources of foreign exchange earnings is likely to be slow, keeping the country’s international reserves position thin.”

Other analysts have warned that if there is a recovery and the central bank injects money to keep rates down, forex shortages will make it difficult to repay debt.

In 2020 some of the injected liquidity has been absorbed by foreing debt repayments – a type of reserve appropriation taking place through unsterilized dollar sales to the Treasury.

Sri Lanka has a soft-pegged central bank set up by a Federal Reserve money doctor in the style of several Latin America central banks which have ended up in import substitution, sovereign default, dollarization, re-denomination or several of such outcomes, analysts have said.

The soft-pegs inspired by Argentina central bank creator Raul Prebisch and former Federal Reserve Latin America chief Robert Triffin, had an unrestrained constitution. (Colombo/Nov23/2020)

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Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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