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Wednesday December 7th, 2022

Sri Lanka Insurance ‘CCC+’ rating confirmed, new Grand Hyatt investment to weaken RBC

ECONOMYNEXT – Fitch Ratings has confirmed a ‘CCC+’ rating of state-run Sri Lanka Insurance Corporation saying proposed ‘super gains tax’ will reduce profits and a 6 billion rupee investment in Grand Hyatt will reduce risk based capital ratios.

Sri Lanka Insurance had strong risk based capital (RBC) ratios of of 434 percent for life and 241 percent for non-life which were above industry average and regulatory requirements.

“Fitch believes SLIC’s additional investment of LKR6 billion in the Grand Hyatt project, as directed by the Sri Lankan government, will weaken the RBC ratios,” the rating agency said.

“…[H]owever, the impact will be manageable because of the insurer’s large total available capital base.”

SLIC had invested two billion rupees out of the six by May 2021.

The Grand Hyatt project was one of several private firms expropriated by the government in 2011, undermining Sri Lanka’s investment framework.

Fitch Affirms Sri Lanka Insurance Corporation’s IFS Ratings at ‘CCC+’/’AA(lka)’

Fitch Ratings – Colombo/Sydney – 24 Nov 2021: Fitch Ratings has affirmed the Insurer Financial Strength (IFS) Rating of Sri Lanka Insurance Corporation Limited (SLIC) at ‘CCC+’. Fitch typically does not apply Outlooks to ratings in the ‘CCC’ category or below.

The agency has simultaneously affirmed SLIC’s National IFS Rating at ‘AA(lka)’ with a Stable Outlook.

KEY RATING DRIVERS

SLIC’s ratings reflect its ‘Favourable’ business profile and its high exposure to sovereign-related investments, equity securities and non-core subsidiaries. The ratings also factor in the insurer’s capital position and financial performance that are better than that of the domestic insurance industry.

Fitch assesses SLIC’s business profile as ‘Favourable’ compared with other Sri Lankan insurance companies because of the leading business franchise, diversified participation and stable business lines across life and non-life insurance sectors, and the large domestic operating scale. SLIC was Sri Lanka’s second-largest life and non-life insurer, based on gross premiums in 1H21 and the largest in terms of total assets. In light of the market rankings, Fitch scores SLIC’s business profile at ‘b-‘ under our credit-factor scoring guidelines on the international rating scale.

SLIC’s high exposure to sovereign and sovereign-related investments caps its investment and asset risk score on the international rating scale at ‘cc’ under Fitch’s credit-factor scoring guidelines. The insurer’s Fitch-calculated risky assets ratio on the international rating scale was 529% in 2020 (2019: 275%), an increase due mainly to the downgrade of the Sri Lankan sovereign rating to ‘CCC’ from ‘B-‘ on 27 November 2020.

SLIC’s regulatory risk-based capital (RBC) ratios of 434% for life and 241% for non-life at end-1H21 were well above the industry average and the 120% regulatory minimum.

Fitch believes SLIC’s additional investment of LKR6 billion in the Grand Hyatt project, as directed by the Sri Lankan government, will weaken the RBC ratios; however, the impact will be manageable because of the insurer’s large total available capital base. The insurer had already invested LKR2 billion out of the total additional requirement of LKR6 billion in May 2021.

Fitch’s Prism Model score dropped one level to ‘Somewhat Weak’ in 2020, from ‘Adequate’ in 2019, due mainly to the increased investment risks on the international rating scale as a result of the downgrade of the sovereign rating. Fitch views SLIC’s Prism Model score as commensurate with the international IFS Rating.

Fitch expects the government’s proposal on 12 November 2021 to introduce a 25% one-off tax on companies with taxable income over LKR2 billion for the fiscal year ended 31 March 2021, if implemented, may put pressure on near-term earnings and limit capital accumulation.

In addition, the government’s proposed introduction in 2022 of the 2.5% social security contribution on annual turnover exceeding LKR120 million, may affect earnings.

SLIC’s underwriting profitability, however, is supported by its scale advantages and prudent underwriting practices. The insurer has consistently maintained its Fitch-calculated non-life
combined ratio below 100% for the past six years. The ratio improved to 88% in 2020 (2019: 95%) before normalising to 98% in 1H21. The improvement in 2020 was due mainly to reduced non-life insurance claims following Covid-19 lockdowns. SLIC’s three-year average return on equity of 10% was satisfactory.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IFS Rating

– A further increase in SLIC’s investment and asset risks on a sustained basis;

– Significant weakening in SLIC’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile;

– Deterioration in the Fitch Prism Model score to well below ‘Somewhat Weak’ for a sustained period;

– Failure to maintain underwriting profitability for a sustained period.
National IFS Rating

– Significant weakening in SLIC’s business profile, for instance, due to a weaker franchise, operating scale or business risk profile;

– Deterioration in the RBC ratio below 350% for life and 200% for non-life for a sustained period;

– Deterioration in the non-life combined ratio well above 100% for a sustained period.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

IFS Rating

– Significant reduction in SLIC’s investment and asset risks on a sustained basis;

– Sustained maintenance of SLIC’s ‘Favourable’ business profile;

– Maintenance of the Fitch Prism Model score well into the ‘Somewhat Weak’ level on a sustained basis.
National IFS Rating

– Significant reduction in SLIC’s investment and asset risks on a sustained basis while maintaining its ‘Favourable’ business profile and capitalisation at current levels.

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon
seasons.

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the
vessel.

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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Sri Lanka President says 2015-2019 policy struggle was ‘warfare’

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.

“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“We were able to get a surplus in the primary budget. But it was warfare.

“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”

Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.

Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.

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Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.

The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.

The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.

Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.

The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.

The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.

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Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.

After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)

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China calls for joint effort to ease Sri Lanka’s debt burden, no mention of restructure

ECONOMYNEXT — A top Chinese official has expressed hope that countries and multilaterals like the International Monetary Fund (IMF) work with Beijing to play a constructive role in easing Sri Lanka’s debt burden, stopping short of an assurance on debt restructuring.

Chinese Foreign Ministry spokesperson Mao Ning was quoted by international media as saying on Monday December 05 that China attaches high importance to Sri Lanka’s difficulties and challenges.

She was responding to a question on media reports that an IMF team will be in China this week to discuss faster progress on debt restructuring for countries including Sri Lanka, which is negotiating for an IMF bailout.

“On Sri Lanka’s debt issue, I’d like to stress that we support the financial institutions in working out ways with Sri Lanka to properly solve the issue,” said Ning.

“We also hope relevant countries and international financial institutions will work with China and continue to play a constructive role in helping Sri Lanka overcome the current difficulties, ease its debt burden and realise sustainable development,” she added.

She said China has long-standing sound cooperation with the IMF and other international economic and financial institutions.

The spokesperson avoided any mention of debt restructuring, a prerequisite for the IMF extended fund facility (EFF).

Nearly a fifth of Sri Lanka’s public external debt is held by China, according to one calculation. The emerging superpower has been generous in Sri Lanka’s time of need, extending much needed assistance in the form of rice, medicine and other commodities.

The latest arrival in the Colombo port from China was 2 billion Sri Lankan rupees worth of essential medicines and medical supplies, delivered on Tuesday.

However, critics say China is doing everything but what Sri Lanka really needs: agreeing to restructure its outstanding debt.

At least one Sri Lankan opposition MP has demanded that China agree to a restructure.

Related:

Sri Lanka debt restructuring: opposition MP warns of “China go home” protests

Tamil National Alliance (TNA) legislator Shanakiyan Rasamanickam, who had been on the warpath with Beijing over an apparent lethargy in helping the crisis-hit island nation restructure its debt, recently warned of a “China, go home” protest campaign similar to the “Gota, go home” protests that unseated the country’s powerful former president in July.

The MP told parliament last Friday December 02 that Sri Lanka owes 7.4 billion dollars to China, a nearly 20-trillion dollar economy, and if the latter was was a true friend, it would agree to either write off this debt or at least help restructure it.

Colombo has been vague at best on the status of ongoing restructure talks with Sri Lanka’s creditors, and opposition lawmakers and others have expressed concern over what seems to be a worrying delay. Rasamanickam and others have claimed that China, Sri Lanka’s largest bilateral creditor, is the reason for the apparent standstill. (Colombo/Dec06/2022)

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