An Echelon Media Company
Tuesday August 16th, 2022

Sri Lanka banks cut foreign borrowings, see more deposit dollarization

ECONOMYNEXT – Sri Lanka’s banks have sharply cut foreign borrowings over the past year, official data show as the country ran out of rating space after seven years of state expansion and monetary indiscipline.

State and private commercial bank borrowing heavily to abroad to buy dollar denominated Sri Lanka Development Bonds, give offshore banking unit loans to the government after 2015 which expanded from 17 to 20 percent of GDP over 5 years.

State-run Ceylon Petroleum Corporation also borrowed each time money was printed to suppress rates, under ‘flexible inflation targeting’.

Meanwhile some banks also bought discounted international sovereign bonds as foreign investors dumped them.

As downgrades came swiftly in 2020 towards CCC with money printing ratcheted up, banks lost the ability to borrow abroad. They also could not renew maturing loans as counterparty funding limits were cut.

Short term foreign currency borrowings of banks had peaked at 4.6 billion US dollars in the third quarter of 2020, central bank data show and had fallen to 1,442 billion US dollars by the first quarter of 2021 in a steep correction.

Long term loans which were around 1.5 billion US dollars in the first quarter of 2020 fell to 1,072 million by the first quarter of 2021.

Short term currency and deposits of commercial banks went up from about billion US dollars in the first quarter of 2020 to around 4.3 billion US dollars by the first quarter of 2022.

Sri Lanka in 2020 introduced special deposit schemes also to draw foreign funds.

Meanwhile some who had invested in SLDBs had also started to pull out fearing a hair-cut.

Data show that foreign borrowings of banks ratcheted up in the 2015/2016 and 2018 currency crises which were triggered money printed to suppress interest rates under ‘flexible’ inflation targeting, a highly unstable monetary regime peddled by Western Mercantilists to third world countries with ‘fear of floating’.

Sri Lanka also has a fear of hard-pegging.

Sri Lanka expanded the state from 2015 to 20 percent of GDP from 2017 after abandoning spending based consolidation (cost cutting) under revenue based consolidation despite having a bloated state and an oversized military.

 

Revenue based consolidation (expanding the state with a higher level of taxes) as well as borrowings have long been advocated by the Janatha Vimukthi Peramuna and is also generally followed by other leftists and American progressives.

During repeated currency crises under ‘flexible’ inflation targeting up to 2019, Sri Lanka also borrowed heavily through International Sovereign bonds as the country lost the ability to repay maturing debt in rupees, forcing foreign borrowings to go up at the gross financing level.

State-run Ceylon Petroleum Corporation also borrowed from commercial banks and suppliers as forex shortages from liquidity injections made under flexible inflation targeting created forex shortages making difficult for the CPC to convert rupees to dollars.

Flexible inflation targeting was coupled with deliberate money printing to target an output gap. The International Monetary Fund gave technical advice to calculate the output gap and target it with printed money.

After two currency crises depressed output Sri Lanka cut taxes in December 2019 saying there was a ‘persistent output gap’ and printed even more money than before. (Sri Lanka fiscal stimulus to close output gap)

In 2019 as the impact of state expansion under revenue based fiscal consolation and the foreign borrowings under flexible monetary policy became clear, analysts warned that the country would soon run out rating space and to discontinue unrestrained monetary policy.

Related

Sri Lanka needs monetary discipline to avoid further downgrades: Bellwether

“Sri Lanka is a country that had mostly kept monetary stability in the worst years of the war with the help of the ideology then prevailing,” EN’s economic columnist Bellwether warned in December 2019 as money printing began around August in a sign of things to come.

“But now each new episode of monetary indiscipline is costing the country one notch in the rating scale.

“Sri Lanka will soon run out of rating space to tap capital markets if the flexible exchange rate/call money rate targeting continues in the next recovery space.

“Sri Lanka will face credit downgrades and possible sovereign default of dollar debt unless the highly unstable discretionary ‘flexible exchange rate’ is restrained and some monetary discipline is brought in.

“Pakistan, whose central bank also prints money with a peg, and frequently runs to the IMF now has a B- rating. But B- is barely above CCC.

“From two levels below investment grade in 2005, Sri Lanka is now a little above CCC, which is a distressed debt level. It is not a place to take monetary risks in particular.

“The central bank and others are talking about the need to get down interest rates,” the column which was written before the 2019 elections but money printing through outright purchases had started around August of the year said.

“That is not re-asssuring.

“It is doubtful whether China will give loans like earlier to boost growth as it is having its own troubles. China’s flexible exchange rate is taking a toll, as are state owned enterprises. However China may give debt relief to Sri Lanka.

“If rates are cut further and money is printed, the recovery in 2020 will be short-lived or not at all, and another currency crisis will be generated and downgrades will follow.”

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