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Thursday June 20th, 2024

Sri Lanka faces political risks over Rajapaksa links of new govt: Fitch

ECONOMYNEXT – Sri Lanka is still facing political risks in recovering from a currency crisis and default, tough a new government has been formed under President Ranil Wickremesinghe with a large majority, Fitch, a rating agency said.

“The new president was confirmed by a large majority in parliament, and his government has drawn in some opposition members,” Fitch said in a statement.

“This gives some hope that it will have sufficient support to negotiate and carry out difficult reforms as part of efforts to restore macroeconomic stability and debt sustainability. Such reforms could unlock funding support from the IMF, which we view as important for Sri Lanka’s emergence from default.”

Members of the Rajapaksa family were driven out by protests. However the administration has little public support since it is linked with the ousted Rajapaksa family.

“The government’s parliamentary position appears strong, but public support for the government is weaker,” the rating agency said.

“President Wickremesinghe was prime minister in the previous administration under President Gotabaya Rajapaksa, who was brought down by protests.

“Parliament and the government also remain dominated by politicians from the Sri Lanka People’s Freedom Alliance, which is closely affiliated with the Rajapaksa family. This may increase the risk of further destabilising protests if economic conditions do not improve and/or reforms generate public opposition.”

Political Risks Still Challenge Sri Lanka’s Emergence from Default

Thu 28 Jul, 2022 – 12:37 AM ET
Fitch Ratings-Hong Kong-28 July 2022: The successful formation of a government under the new president, Ranil Wickremesinghe, is an important precondition for resolving Sri Lanka’s debt default, but many challenges remain as the country seeks financing support from the IMF and debt restructuring from private and official bilateral creditors, says Fitch Ratings.

The new president was confirmed by a large majority in parliament, and his government has drawn in some opposition members. This gives some hope that it will have sufficient support to negotiate and carry out difficult reforms as part of efforts to restore macroeconomic stability and debt sustainability. Such reforms could unlock funding support from the IMF, which we view as important for Sri Lanka’s emergence from default.

The government’s parliamentary position appears strong, but public support for the government is weaker. President Wickremesinghe was prime minister in the previous administration under President Gotabaya Rajapaksa, who was brought down by protests. Parliament and the government also remain dominated by politicians from the Sri Lanka People’s Freedom Alliance, which is closely affiliated with the Rajapaksa family. This may increase the risk of further destabilising protests if economic conditions do not improve and/or reforms generate public opposition.

We expect any reform package agreed with the IMF by the government to include elements such as higher taxes, expenditure rationalisation and a commitment to a greater degree of exchange-rate flexibility. There is a significant risk that such reforms could cause public opposition that might impede their implementation. In the absence of an IMF deal, we expect Sri Lanka to face a very strained external position in the near term. The country has little foreign exchange to pay even for essential imports such as fuel, food and medicines, with official reserve assets at just USD1.9 billion (just over one month of imports) as of end-June.

In a statement on 30 June, the Fund noted that it assessed Sri Lanka’s public debt as unsustainable, and confirmed that it would require adequate financing assurances from Sri Lanka’s creditors that debt sustainability would be restored.

Debt negotiations could be complicated by debt owed to China. This amounted to USD5 billion at end-2020, including bilateral official lending and loans from the China Development Bank and Export-Import Bank of China, accounting for around 13% of Sri Lanka’s external debt, according to the IMF. China has traditionally preferred to offer relief for large loans through deferrals such as maturity extensions, payment rescheduling or grace periods, rather than through write-downs.

However, this approach could increase challenges for Sri Lanka to successfully negotiate debt restructuring with other creditors, including private creditors, that delivers the debt sustainability sought by the IMF.

Fitch rates Sri Lanka’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘RD’ (Restricted Default). The Long-Term Local-Currency IDR is ‘CCC’, and is Under Criteria Observation following our introduction of +/- modifiers in the ‘CCC’ category.

A default on local-currency debt could erode local banks’ capital positions, possibly leading to government capital injections into the banking sector that would erode the net benefits of such a restructuring, and when we affirmed the Long-Term Local-Currency IDR in May we assumed that the government would continue to service local-currency debt. Nonetheless, the ‘CCC’ rating reflects a high risk that local-currency debt will be included in debt restructuring, as the stock and interest costs are large, and omitting it could increase the restructuring burden on holders of foreign-currency debt.

Fitch may move Sri Lanka’s LTFC IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community.

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Sri Lanka shares debt management experience at global forum

ECONOMYNEXT – Sri Lanka has shared its experiences at a forum on debt management to “provide lessons for others”, State Minister of Finance Shehan Semasinghe has said.

Semasinghe spoke on “The Role of Debt Management in Navigating Crises” at the 14th Debt Management Facility (DMF) Stakeholders’ Forum, in Livingstone, Zambia.

“I shared the experiences of Sri Lanka which can provide valuable lessons for others and explored the critical elements of capacity building and sound institutional practices in managing debt, particularly in the context of economic challenges,” Semasinghe said on X (twitter).

“Sri Lanka’s experience demonstrates that effective debt management is not just about managing numbers but also about building robust institutions and capacities.”

The journey underscores the importance of transparent, accountable governance and the need for international support and cooperation in times of crisis, he said.

“Sri Lanka prioritized addressing gaps in public debt management by drafting a consolidated Public Debt Management Act, ensuring clarity and legal robustness and establishing a centralized Public Debt Management Office with operational autonomy.

“The role of debt management in navigating crises is multifaceted and critical. Further, by investing in capacity building, adhering to sound institutional practices, and strategically managing debt restructuring and liability operations, countries can better withstand economic shocks and pave the way for sustainable recovery.”

Developing countries face severe debt distress as they are more vulnerable to external shocks, Semasinghe said, and “managing global debt requires coordinated international efforts on debt restructuring where necessary, timely fiscal policy adaptation and help sustainable economic growth.”

The state minister also pointed out the financial impact of climate change was an emerging challenge, as countries need investment to mitigate and adapt to climate impacts, “especially through non-debt creating inflows, which would require private capital mobilization.” (Colombo/Jun20/2024)

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Sri Lanka rupee closes stronger at 305.10/30 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger ahead of the long weekend at 305.10/30 to the US dollar on Thursday, up from 305.40/55 to the US dollar Wednesday, dealers said, while some bond yields edged up.

A bond maturing on 15.12.2026 closed at 10.45/80 percent, up from 10.35/75 percent.

A bond maturing on 01.07.2028 closed at 11.20/45 percent.

A bond maturing on 15.09.2029 closed at 12.00/15 percent, up from 11.95/12.35 percent.

A bond maturing on 01.12.2031 closed at 12.05/25 percent.
(Colombo/Jun20/2024)

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Sri Lanka stocks close up, JKH trade pushes turnover

ECONOMYNEXT – The Colombo Stock Exchange closed up on Thursday, data on its site showed.

The broader All Share Index closed up 0.19 percent, or 23.11 points, at 12,249; while the more liquid S&P SL20 Index closed up 0.15 percent, or 5.33 points, at 3,610.

Turnover was 2 billion. Nearly half of this (Rs980mn) came from a crossing on John Keells Holdings Plc. The share closed down at 202.00.

“There were several crossings today which pushed turnover,” market participants said.

“Institutions and high net-worth activity drove the market, while the retail investors we feel are still about uncertain and adopting a wait-and-see approach.”

Melstacorp Plc was among the companies that saw active volumes (Rs194mn) in the day. The share closed up at 87.10.

Top contributors to the index included TeeJay Lanka Plc (up at 41.70), Sampath Bank Plc (up at 79.50), Hatton National Bank Plc (down at 201.00). Hayleys Plc (up at 105.00) and its subsidiary Hayleys Fabric Plc (up at 46.60) were also positive contributors. (Colombo/Jun20/2024)

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