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Sunday December 4th, 2022

Sri Lanka Insurance Corporation downgraded to CC by Fitch amid broken soft-peg

ECONOMYNEXT – Fitch has downgraded Sri Lanka Insurance Corporation Limited’s (SLIC) insurer Financial Strength (IFS) Rating to ‘CC’, from ‘CCC+’, and has placed the rating on watch for downgrade due to risk from forex shortages from a broken soft-peg.

“The downgrade reflects the probability that ceased or interrupted payments could occur on SLIC’s foreign-currency obligations due to weak foreign-currency liquidity in the local banking system,” Fitch said.

“Fitch believes counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.”

Sri Lanka has an intermediate regime central bank which has been triggering currency crises with increasing frequency since the end of a civil war (2011/12, 2015/16, 2018 and 2020/22) which sent the rupee from 113 to 340 so far.

Fitch said counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.

The rating agency said the heightened investment risks and earnings pressure could affect SLIC’s regulatory capital profile.

“SLIC’s Fitch-calculated risky asset ratio is partly driven by the insurer’s large investment in listed and unlisted equities'” Fitch said.

“Fitch believes the recent five-day closure of the Colombo Stock Exchange undermines the liquidity of SLIC’s listed investments, especially if such closures become recurrent,”

Fitch said, it weak operating environment will affect the firm’s earning and growth in motor insurance , the largest contributor to non-life premiums will remain subdued due to the continuation of the government’s ban on auto imports, imposed in 2020 to control currency depreciation is expected.

The full statement is reproduced below

Fitch Downgrades Sri Lanka Insurance Corp’s IFS to’CC’; Places IFS, ‘AA(lka)’ National IFS on RWN

Fitch Ratings – Sydney/Hong Kong – 21 Apr 2022: Fitch Ratings has downgraded Sri Lanka Insurance Corporation Limited’s (SLIC) Insurer Financial Strength (IFS) Rating to’CC’, from ‘CCC+’, and has placed the rating on Rating Watch Negative (RWN).

SLIC’s National IFS Rating of ‘AA(lka)’ has also been placed on RWN.

Fitch has also taken rating action on seven other Sri Lankan insurers; please see FitchPlaces Seven Sri Lankan Insurers on Rating Watch Negative, published 21 April 2022.

KEY RATING DRIVERS

The downgrade reflects the probability that ceased or interrupted payments could occur on SLIC’s foreign-currency obligations due to weak foreign-currency liquidity in the localbanking system.

Fitch believes counterparty risk of SLIC’s foreign-currency assets have risen following recent negative rating action on the Sri Lanka sovereign and various financial institutions.

The insurer has foreign-currency exposure via investments in SriLanka development bonds and deposits with local banks.

The RWN is driven by heightened near-term downside risks to the insurer’s credit profile,including elevated investment and liquidity risk, pressure on its regulatory capital positionand a weaker financial performance outlook.

The RWN also reflects potential pressure onSLIC’s foreign-currency obligations due to stretched foreign-currency liquidity in thelocal banking system and the uncertain impact from SLIC’s non-insurance subsidiaries.

Fitch believes the recent negative rating action on the Sri Lanka sovereign and various financial institutions underscores SLIC’s investment risks, as its investment portfolio isdominated by fixed-income securities issued or guaranteed by the government.

It also includes deposits and securities issued by local banks, non-bank financial institutions andcorporations; Fitch downgraded the Sri Lankan sovereign’s Long-Term Foreign-CurrencyIssuer Default Rating to ‘C’, from ‘CC’, and had placed the ratings of several financialinstitutions on RWN, see Fitch Places 13 Sri Lankan Banks on Rating WatchNegative and Fitch Places Bank of Ceylon on Rating Watch Negative.

Fitch assumes the Ministry of Finance’s 12 April 2022 announcement that the state andpublic sector borrowers will cease all foreign-currency debt payments on borrowings thatare governed by law other than Sri Lankan law will not apply to SLIC’s policyholderobligations or its subsidiaries’ debt obligations.

SLIC’s insurance operation does not haveany debt in its capital structure. However, one of its non-insurance subsidiaries hasforeign-currency borrowings from a state-owned bank, according to the latest annualreport. It is not clear if the subsidiary will have to stop payment on these borrowings or ifthis would become SLIC’s direct liability should the subsidiary be unable to pay, as theentity is ultimately owned by the state.

SLIC’s foreign-currency denominated insurance contract obligations tend to be small andlimited to certain non-motor classes, according to the company. The insurer, like otherdomestic insurers, relies on access to foreign-currency to make premium payments toforeign reinsurers and meet other costs that are typically sourced from overseas.

SLIC’s Fitch-calculated risky asset ratio (end-2020: 529%) is partly driven by the insurer’slarge investment in listed and unlisted equities. Fitch believes the recent five-day closureof the Colombo Stock Exchange undermines the liquidity of SLIC’s listed investments,especially if such closures become recurrent.

Fitch believes the heightened investment risks and earnings pressure could affect SLIC’sregulatory capital profile. A significant deterioration in the credit profiles of financialinstitutions could lead to lower regulatory risk-based capital (RBC) ratios, as investmentswill be subject to incremental risk charges according to local regulatory RBC rules.SLIC’s Fitch Prism Model score is ‘Somewhat Weak’, based on 2020 results, and is drivenby high asset risk charges.

Fitch expects the weak operating environment to affect SLIC’s earnings, similarly to therest of the industry. Growth in motor insurance – the largest contributor to non-lifepremiums – is likely to remain subdued, as Fitch expects the government’s ban on autoimports, imposed in 2020 to control currency depreciation, to continue. In addition,underwriting profit will be squeezed by rising motor spare-part costs due to currencydevaluation, while overall costs will climb with rising inflation. Insurers, including SLIC,also have limited ability to reprice policies, given the dent in customers’ disposableincomes.

SLIC, like other Sri Lankan non-life insurers, relies on international reinsurers to protectits non-motor businesses. Fitch thinks any material changes to reinsurance structures uponrenewal due to rising reinsurance costs could undermine the insurer’s risk managementpractices and ability to write new business.

RATING SENSITIVITIES

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

Fitch expects to resolve the RWN in the next six months once the impact on the insurer’scredit profile becomes more apparent. Fitch also seeks greater clarity on the government’srestrictions on servicing foreign-currency obligations, including the impact on SLIC’spolicyholder obligations and the debt obligations of its non-insurance subsidiaries.
Potential triggers that could lead to a downgrade include:

– inability to access foreign- or local-currency assets to meet liabilities

– any government restrictions that impede the insurer’s ability, or that of subsidiaries, to
service foreign- or local-currency policyholder or debt obligations

– rising investment and asset risks, including a downgrade of the ratings of financial
institutions

– a sustained drop in the regulatory RBC ratio, with no plans to rectify the situation

– sustained weakness in financial performance and earnings or risk management practices

– a downgrade of the sovereign rating stemming from a default event.

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

– There is limited scope for upward rating action given the RWN.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions,measured in a positive direction) of three notches over a three-year rating horizon; and aworst-case rating downgrade scenario (defined as the 99th percentile of rating transitions,measured in a negative direction) of four notches over three years. The complete span ofbest- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to’D’. Best- and worst-case scenario credit ratings are based on historical performance. Formore information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the
Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is ascore of ‘3’. This means ESG issues are credit-neutral or have only a minimal creditimpact on the entity, either due to their nature or the way in which they are beingmanaged by the entity.

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Paris Club proposes 10-year moratorium on Sri Lanka debt, 15 years of debt restructuring

ECONOMYNEXT — The Paris Club group of creditor nations has proposed a 10-year debt moratorium on Sri Lankan debt and 15 years of debt restructuring as a formula to resolve the island nation’s prevailing currency crisis, India’s The Hindustan Times reported.

While the Paris Club has yet to formally reach out to India and China, Colombo has yet to initiate a formal dialogue with the Xi Jinping regime, the newspaper reported on Saturday December 03, inferring that the chances of the International Monetary Fund (IMF) approving its 2.9 billion dollar extended fund facility for Sri Lanka in December now ranges from very low to nonexistent.

“This means that Sri Lanka will have to wait for the March IMF meeting of the IMF before any aid is extended by the Bretton Woods institution,” the newspaper reported.

“Fact is that for Sri Lanka to revive, creditors will have to take a huge hair cut with Paris Club clearly hinting that global south should also take the same cut as global north notwithstanding the inequitable distribution of wealth. In the meantime, as Colombo is still to get its act together and initiate a dialogue and debt reconciliation with China, it will need bridge funding to sustain the next three month before the IMF executive board meeting in March 2023. Clearly, things will get much worse for Sri Lanka before they get any better—both economically and politically,” the report said. (Colombo/Dec04/2022)

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Sri Lanka’s Ceylon tea prices up amid low volumes

ECONOMYNEXT – Sri Lanka tea prices picked up at the last auction in November amid low volumes, brokers said.

“Auction offerings continued to record a further decline and totalled 4.2 million Kilograms, of which Ex-Estate offerings comprised of 0.6 million Kilograms. There was good demand,” Forbes and Walker Tea brokers said.

“In the Ex-Estate catalogues, overall quality of teas showed no appreciable change. Here again, there was good demand in the backdrop of extremely low volumes.”

High Growns

BOP Best Westerns were firm to 50 rupees per kg dearer. Below best and plainer types were Rs.50/- per kg easier on last.

Nuwara Eliya’s were firm.

BOPF Best Westerns were firm to selectively dearer. Below best and plainer teas declined by 50 rupees per kg.

Uva/Uda Pussellawas’ were generally firm and price variances were often reflective of quality with the exception of Select Best Uva BOPF’s which were firm and up to 50 rupees per kilogram dearer.

CTC teas, in general, were mostly firm.

“Most regular buyers were active, with perhaps a slightly more forceful trend from the local trade,” brokers said.

Corresponding OP1’s met with improved demand. Well-made OP/OPA’s in general were fully firm, whilst the Below Best varieties and poorer sorts met with improved demand. PEK/PEK1’s, in general, were fully firm to selectively dearer.

In the Tippy catalogues, well-made FBOP/FF1’s sold around last levels, whilst the cleaner Below Best and cleaner teas at the bottom appreciated. Balance too were dearer to a lesser extent.

In the Premium catalogues, very Tippy teas continued to attract good demand. Best were firm to selectively dearer, whilst the Below Best and cleaner teas at the bottom appreciated

Low Growns

Low Growns comprised 1.8 million Kilograms. Market met with improved demand, in general.

In the Leafy & Semi Leafy catalogues, select Best BOP1/OP1’s were fully firm, whilst the Below Best/bolder BOP1’s were barely steady.

Low-grown teas, farmed mainly by smallholders and exported to the Middle East and Central Asia, are the most sought-after and expensive Ceylon Teas.

Low-grown CTC prices have gained this week to 982.80 per kilogram this week from 934.76 per kilogram last week.

Few Select best BOP1s maintained, whilst best and below best were irregularly lower. Poorer types maintained.

BOPF’s in general, firm market.

FBOPF/FBOPF1’s select best and best increased in value, whilst the below best and bottom held firm.

Selected best BOP1’s maintained, whilst best and below best were irregularly lower.Poorer types maintained.

OP1’s selects best together with best and below best were firm to dearer. Poorer sorts were fully firm.

Medium Growns

BOPF’s, select best gained by 50 rupees per kilogram. Others maintained.

BOP1’s select best dearer by 100 rupees per kg whilst all others moved up by 50 rupees per kg.

OP1: select best gained by 100 rupees per kg whilst all others dearer by 100 rupees per kg.

OP/OPA’s in general, dearer by 50 rupees per kg whilst the poorer sorts were firm.

PEK’s Select best gained by 50 rupees per kg whilst all others maintained. PEK1: In general, dearer by 50 rupees per kg. (Colombo/Dec 04/2022)

 

 

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Sri Lanka Ports Authority East Terminal contractor paid: Minister

ECONOMYNEXT – Sri Lanka’s Ports Authority had paid a deposit for a gantry crane and made the required payment for the contractor to complete building the East Container Terminal, Minister Nimal Siripala De Silva said.

The East Container Terminal, a part of which is already built is being completed as a fully SLPA owned terminal at a cost of 480 million dollars Ports and Shipping Minister de Silva said.

“ECT we are funding with money available in the ports authority,” he said.

“Up to now we have paid an advance for the gantry crane. And for the construction we have paid all the money agreed with the contractor. So that is going on well.”

Sri Lanka is undergoing the worst currency crisis in the history of the island’s soft-pegged (flexible exchange rate) central bank which has created difficulties in funding the project.

“Every penny we collect as dollars we are keeping them separately and utilizing that for the Eastern Terminal work,” Minister de Silva said.

“We are confident that the ECT will be completed within the envisaged time. It is a difficult task in view of the dollar problem.

Banks were also not releasing the dollar deposits of the SLPA earlier but are now doing so, he said.

“Our deposits in banks they have utilized for urgent other national purposes,” he said.

“So they are releasing that money slowly. I am happy that they are releasing that money little by little. So with that we will be able to manage that.”

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