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Tuesday August 16th, 2022

Sri Lanka bank forced to give loans, privileges for loss-making airline because it was SOE

ECONOMYNEXT- State-run Bank of Ceylon had been forced to give loans to loss-making SriLankan Airlines and extend special privileges when it failed to repay, because it was a state owned enterprise (SOE), a witness told a commission of inquiry.

"If we thought as a commercial bank, if we had given these loans to another company, these would have been lost opportunities to use the funds more effectively,” Bank of Ceylon (BOC) Offshore Banking Division Chief Manager Upul Wijegunawardena said.

"However, since BOC is a state-owned entity and SriLankan is the national carrier, we have to make a consideration.”

He was testifying at a Presidential Commission of Inquiry into irregularities at SriLankan Airlines and Mihin Lanka, a defunct budget carrier.

BOC now has 190 million US dollars of outstanding SriLankan loans, he said.

Wijegunawardena said the Bank Supervision Department of the Central Bank had written to BOC in 2014, requesting it to carefully examine SriLankan’s finances, efficiency and state of operations before issuing loans above limits, even if the airline is a state-owned entity.

BOC has given 12.9 billion rupees in loans to SriLankan since 2014 which have yet to be repaid, he said.

Letters of Comfort the Treasury issued as collateral for the loans had expired in June 2018, with discussions still ongoing to issue new Letters of Comfort, Wijegunawardena said.

"It would take 3 months for loans to fall under NPL (non-performing loans)," he said, when commissioner Wasantha Geeganage, the Director General of the Sri Lanka Accounting and Auditing Standards Monitoring Board, asked if the SriLankan loans had gone bad.

Another 100 million US dollars in loans had also been provided with Letters of Comfort which are still valid, he said.

Most of the loans had been taken for working capital, to cancel leases of Airbus A350 aircraft and to repay fuel bills of the state-run Petroleum Corporation.

Wijegunawardena said that SriLankan has kept repaying interest on the loans, while renewing the principal amount owed.

He said the Treasury requested BOC to fund SriLankan, since it is the national carrier which cannot be closed, and BOC has to oblige, since the state is the sole shareholder.

SriLankan was privatized in the late 1990s but Emirates was driven out during the Rajapaksa regime, and it became a fuly owned loss-making SOE.

"Is this acceptable to the bank, that only interest is being paid without loans being settled? Is this the policy of the bank? Do individuals or other companies get such privileges?” Retired Supreme Court Justice Anil Gunaratne asked.

"No, they don’t," Wijegunawardena said.

In response to another question Gunaratne posed, Wijegunawardena said that he was aware the money being loaned to SriLankan was public money deposited in the bank.

He said the Treasury has requested BOC and People’s Bank to fund SriLankan. But now there were plans to operate under a public-private partnership.

However, the National Agency for Public Private Partnerships headed by Thilan Wijesinghe has not responded to the bank’s requests to submit a report on the progress, he said.

"We have continuously requested for the final report, but we haven’t received it," Wijegunawardena said.

Wijegunawardena said since he took over the position at the offshore unit of Bank of Ceylon, it has sent numerous memos and board papers to the BOC board to recover the SriLankan loans.

"SriLankan Airlines also sends many requests. They want to make the interest payments as a bullet payment with the loan principal,” he said.

"We ignore such requests. We always ask them to pay the interest. We always follow up with the Treasury and lodge claims if the letters of comfort expire and we have always requested for Treasury Guarantees instead of Letters of Comfort.”

He said that the first 5 billion rupees of the unsettled local currency denominated loans had been given in December 2014 based on an understanding that the government would capitalise SriLankan with 125 million US dollars with a priority towards settling BOC loans by March 31, 2015.

However, the government changed in January 2015.

The government only later issued letters of comfort, Wijegunawardena said.

Between 2007 and 2015, a number of loans had been extended to SriLankan without collateral, many of which were later collateralized using shares of the profitable SriLankan Catering Limited, he said.

Most of the debts prior to 2014 had been repaid, either through funds available in the SriLankan current account or through Treasury Bonds issued to SriLankan, he said. (COLOMBO, 24 August, 2018)

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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.

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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)

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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)

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