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Sunday December 4th, 2022

Sri Lanka Insurance rating downgraded to ‘B’, outlook negative: Fitch

ECONOMYNEXT – Fitch Ratings has downgraded the insurer rating of state-run Sri Lanka Insurance Corporation Limited to ‘B’ from ‘B+’ with a negative outlook.

The downgrade assumed a 35 percent fall in the stock market and 16 percent default of high yield debt.

“The downgrade reflects the rising pressures in the operating environment and in the insurer’s business profile as well as heightened investment and asset risks, all of which are caused mainly by the deterioration in the sovereign’s credit profile,” Fitch Ratings said.

Sri Lanka slashed value added taxes in January after a new administration came into power, pushing the deficit up.

On January 30, the central bank cut rates, despite the deficit going up, putting pressure on state credit, while private credit was also expected to recover amid a cyclical recovery from a 2028 currency collapse.

More money has been printed since a Coronavirus crisis began.

Sri Lanka is now in another currency crisis, making it more difficult for the government to settle loans. The sovereign rating had now been cut to ‘B-‘ by Fitch.

“The Negative Outlook on SLIC reflects the agency’s expectations of further weakening in the insurer’s investment-related risks because of its sizeable exposure to the sovereign related assets and any near-term volatility in earnings caused by the pandemic,” the rating agency said.

The full statement is reproduced below.

Fitch Downgrades Sri Lanka Insurance’s IFS to ‘B’; Outlook Negative

Fitch Ratings – Sydney/Colombo – 30 Apr 2020: Fitch Ratings has downgraded Sri Lanka-based Sri Lanka Insurance Corporation Limited’s (SLIC) Insurer Financial Strength (IFS) Rating to ‘B’ from ‘B+’. The Outlook is Negative. SLIC’s National IFS Rating was not covered in this review.

KEY RATING DRIVERS

The rating action follows Fitch’s annual review of SLIC. The review took into consideration Fitch’s current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of rating assumptions described below.

These assumptions were used by Fitch to develop pro forma financial metrics for SLIC that Fitch compared with both the rating guidelines in its criteria and with previously established rating sensitivities for SLIC.

The downgrade reflects the rising pressures in the operating environment and in the insurer’s business profile as well as heightened investment and asset risks, all of which are caused mainly by the deterioration in the sovereign’s credit profile.

Fitch downgraded Sri Lanka’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘B-‘
from ‘B’ on 24 April 2020 (see “Fitch Downgrades Sri Lanka to ‘B-‘; Outlook Negative”
at www.fitchratings.com/site/pr/10119653).

The Negative Outlook on SLIC reflects the agency’s expectations of further weakening in
the insurer’s investment-related risks because of its sizeable exposure to the sovereignrelated
assets and any near-term volatility in earnings caused by the pandemic.

Fitch continues to factor in SLIC’s above-industry capital position in the IFS Rating.

Fitch believes that the sovereign’s downgrade underscores SLIC’s investment risks as all the insurer’s invested assets are in Sri Lanka.

Under Fitch’s credit-factor scoring guidelines, the insurer’s investment and asset risk score is capped at ‘ccc+’ due to its high exposure to sovereign-related investments. SLIC’s risky asset ratio was 219% in 2019 (2018: 203%).

Fitch has lowered SLIC’s business profile score under our credit-factor scoring guidelines to ‘b+’ from ‘bb-‘ due to the agency’s view of a weakened operating environment.

We continue to rank SLIC’s business profile as ‘Favourable’ compared with that of other Sri
Lankan insurance companies due to the leading business franchise, participation in welldiversified and stable business-lines and large domestic operating scale.

SLIC is Sri Lanka’s second-largest life insurer and third-largest non-life insurer based on gross written
premiums.

SLIC’s capitalisation – measured by Fitch’s Prism Factor-Based Capital Model (Prism FBM) – was ‘Strong’ at end-2019. Under Fitch’s coronavirus rating case, the pro forma Prism FBM score drops to ‘Somewhat Weak’, which is commensurate with the guideline for ‘BB’ rated insurers.

We expect the insurer’s sufficient capital buffers, strengthened partly by its large unallocated participating surpluses, to mitigate the impact from any potential investment losses stemming from volatile financial markets. SLIC’s life and nonlife risk-based capital (RBC) ratios were 434% and 208%, respectively, at end-2019 (2018: 437%, 200%), well above the industry average and the 120% regulatory minimum.

Fitch thinks the government’s measures to contain the spread of the virus, and the subsequent halt in economic activities, could hamper the industry’s new business growth.

For life insurance, we expect new business generation to be subdued over the near-term as most insurers, including SLIC, predominantly use agency networks that rely on human interaction for distribution.

In addition, we expect non-life business growth to slow in light of the government’s temporary restriction on non-essential goods imports, including motor vehicles, to control currency depreciation.

SLIC’s three-year average combined ratio was 95%, comfortably beating industry averages. The combined ratio increases to 97% under the agency’s pro forma rating case.

Assumptions for Coronavirus Impact (Rating Case)

Fitch used the following key assumptions in support of the pro forma ratings analysis discussed above:

– Decline in key stock market indices by 35% relative to 1 January 2020;

– Increase in two-year cumulative high-yield bond default rate to 16%, applied to current non-investment grade assets;

– Both upward and downward pressure on interest rates, with spreads widening (including high-yield by 400bp) coupled with notable declines in government rates;

– A COVID-19 infection rate of 5% and a mortality rate (as a percentage of infected) of 1%;

– For the non-life sector, COVID-19-related claims impact on the industry-level accident year loss ratio at 3.5 percentage points (pp) to be offset partially by an advantageous 1.5pp, on average, from the auto line; and

– Impairment in the value of non-investment grade invested assets by 12%.

RATING SENSITIVITIES

The IFS Rating remains sensitive to any material change in Fitch’s rating case assumptions on the pandemic. Periodic updates to our assumptions are possible in light of the rapid pace of changes in government action in response to the pandemic, and the speed with which new information is available on the medical aspects of the outbreak. A discussion of how we expect ratings would be affected under a set of stress case assumptions is included at the end of this section to help frame sensitivities in a severe downside scenario.

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

– A material adverse change in Fitch’s rating assumptions on the coronavirus impact.

– A further increase in its investment and asset risks on a sustained basis.

– Deterioration in Prism FBM score well below ‘Somewhat Weak’ for a sustained period.

– Significant deterioration in financial performance and earnings for a sustained period.

– Significant weakening in SLIC’s business profile.

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

– Significant reduction in SLIC’s investment and asset risks on a sustained basis will lead to a revision of the rating Outlook to Stable.

– A material positive change in Fitch’s rating assumptions on the coronavirus impact.

– A positive rating action is prefaced by Fitch’s ability to reliably forecast the impact of the pandemic on the financial profile of both the Sri Lankan insurance industry and SLIC.

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

– Maintenance of Prism FBM score well into the ‘Adequate’ level on a sustained basis.
Stress Case Sensitivity Analysis

– Fitch’s stress case assumes the following: a 60% stock market decline; two-year cumulative high-yield bond default rate of 22%; high-yield bond spreads widening by 600bp and more prolonged declines in government rates; heightened pressure on access to capital markets; a COVID-19 infection rate of 15% and mortality rate of 0.75%; an adverse non-life industry-level loss ratio impact of 7pp for COVID-19 claims, partially offset by an advantageous 2pp for motor; a one-notch lower sovereign rating; and impairment of non-investment grade invested assets by 20%.

– The implied rating impact under the stress case would be an additional one-notch downgrade to SLIC’s IFS Rating.

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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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