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Sri Lanka among low rated emerging sovereigns facing rollover risk: Moody’s

ECONOMYNEXT – Sri Lanka is among several low rated emerging countries that are facing “significant rollover risk” amid currency depreciation and an increase in credit spread, Moody’ a rating agency said.

“Low-rated EM sovereigns with large international bond maturities over the next
few quarters face significant rollover risk,” the rating agency said.

“Given local-currency depreciation, a sharp increase in credit spreads, and dysfunctional primary markets for new issuances, unless some risk appetite returns, non-investment grade EM sovereigns will face significant costs refinancing maturing international bonds.

“While some countries have already secured refinancing for individual bonds, Sri Lanka (B2 stable), Honduras (B1 stable), Turkey (B1 negative) and Tunisia (B2 stable) are in particular susceptible given the size of upcoming international bond redemptions as a share of foreign-exchange reserves.”

Sri Lanka has a billion US dollar sovereign bond to pay in October, but the country has got a 500 million dollar loan from China, Moody’s said.

“Sri Lanka secured a $500 million facility from China Development Bank (A1 stable) that bolsters foreign-exchange reserves ahead of the upcoming $1 billion payment in October, although weaker dollar inflows from subdued tourism activity and textile receipts are likely to keep foreign exchange reserves low through the remainder of the year.

The loan will be upsized to a billion US dollars, the finance ministry has said.

Sri Lanka has started to print large volumes of money through helicopter drop style moves involving , despite having a pegged exchange rate, making a central bank profit transfer of 24 billion rupees, an outright injection of CB credit through a treasuries purchase and a reserve ratio cut of a similar amount.

Another 50 billion rupee central bank credit backed refinance facility has also been announced.

In 2018 also Sri Lanka sacrificed monetary stability for ‘stimulus’ and started printing money from April, triggering a currency crisis, critics have pointed out.

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Sri Lanka has about 4.0 billion US dollars in debt to service. When a pegged regime injects liquidity, demand for dollars outstrips supply, classical economists have pointed out.

“Based on the size of upcoming international bond redemptions in foreign currency as a share of foreign exchange reserves over the next four quarters, Sri Lanka, Turkey, Honduras and Tunisia are particularly susceptible (see Exhibit 3).

“Other sovereigns such as Bahrain, Fiji (Ba3 stable) and Montenegro (B1 stable) also have large repayments due.(Colombo/Mar31/2020)

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