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Friday December 8th, 2023

Sri Lanka local currency rating upgraded to CCC+ by S&P

ECONOMYNEXT – S&P Global ratings said Sri Lanka’s local currency rating was raised to CCC+/C from SD (selective default), after the completion of a domestic debt restructuring.

“We raised our local currency ratings on Sri Lanka to ‘CCC+/C’ to reflect a forward-looking opinion about Sri Lanka’s creditworthiness on local currency obligations following the completion of the government’s domestic debt exchange program with superannuation funds,” S&P said.

“We viewed this exchange as distressed rather than opportunistic due to the government’s very high interest burden and local currency debt stock. In our opinion, the restructuring also resulted in lenders receiving less than originally promised.”

“The stable outlook on the long-term local currency rating reflects the balance of improvements to the government’s debt profile achieved through its domestic restructuring exercises against the continued risk to the government’s fiscal sustainability posed by Sri Lanka’s ongoing economic, external, and fiscal pressures.”

Sri Lanka’s foreign currency rating remains at Selective Default.

The full statement is reproduced below:

Sri Lanka Local Currency Ratings Raised To ‘CCC+/C’ From ‘SD/SD’; Outlook Stable

Overview

• On Sept. 14, 2023, Sri Lanka settled a debt exchange program on some of its local-currency-denominated government bonds held by superannuation funds.

• On Sept. 21, 2023, the government also completed a restructuring of its obligations to the Central Bank of Sri Lanka.

• We are adopting a forward-looking opinion about Sri Lanka’s creditworthiness on its local currency obligations post-default.

• We raised our long- and short-term local currency sovereign credit ratings on Sri Lanka to ‘CCC+/C’, from ‘SD/SD’ (selective default) and affirmed our ‘SD/SD’ foreign currency ratings.

• The outlook on the ‘CCC+’ long-term local currency rating is stable.

Rating Action

SINGAPORE (S&P Global Ratings) Sept. 25, 2023–S&P Global Ratings today raised its long- and short-term local currency sovereign credit ratings on Sri Lanka to ‘CCC+/C’ from ‘SD/SD’ (selective default). At the same time, we affirmed our ‘SD/SD’ long- and short-term foreign currency ratings. The outlook on the ‘CCC+’ long-term local currency rating is stable. We also raised the issue rating on Sri Lanka’s local currency bond maturing in October 2023 to ‘CCC+’ from ‘D’.

Outlook

Our long-term foreign currency rating on Sri Lanka is ‘SD’. We do not assign outlooks to ‘SD’ ratings because they express a condition and not a forward-looking opinion of default probability.

The stable outlook on the long-term local currency rating reflects the balance of improvements to the government’s debt profile achieved through its domestic restructuring exercises against the continued risk to the government’s fiscal sustainability posed by Sri Lanka’s ongoing economic, external, and fiscal pressures.

Downside scenario

We could lower the long-term local currency ratings on Sri Lanka if there are indications of further restructuring of obligations denominated in Sri Lankan rupees (LKR) to commercial creditors. Developments that could precede these indications include a rapid rise in inflation, a further rise in the government’s interest burden, or a significantly worse fiscal performance by the government leading to local currency funding pressures.

Upside scenario

We could raise the long-term local currency sovereign credit rating on Sri Lanka if we perceive that the sustainability of the government’s large local currency debt stock has improved further. This could be the case if, for example, the government’s fiscal metrics, and the performance of the Sri Lankan economy, improve much more quickly than we expect.

We could raise our long-term foreign currency sovereign credit rating upon completion of the government’s bond restructuring. The rating would reflect Sri Lanka’s creditworthiness post-restructuring.
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

We raised our local currency ratings on Sri Lanka to ‘CCC+/C’ to reflect a forward-looking opinion about Sri Lanka’s creditworthiness on local currency obligations following the completion of the government’s domestic debt exchange program with superannuation funds. We viewed this exchange as distressed rather than opportunistic due to the government’s very high interest burden and local currency debt stock. In our opinion, the restructuring also resulted in lenders receiving less than originally promised.
We also raised the rating on Sri Lanka’s October 2023 local currency bond to ‘CCC+’, in line with the change in the sovereign credit rating.

Sri Lanka also completed on Sept. 21, 2023, a separate restructuring exercise on its debt owed to the Central Bank of Sri Lanka. Outstanding provisional advances and Treasury bills held by the central bank were converted primarily into Treasury bonds with maturities in 2029-2038, carrying fixed interest rates that will step down in 2025 and 2027.

A much smaller portion of the outstanding credits have been converted to short-term Treasury bills. S&P Global Ratings’ sovereign ratings do not reflect the government’s capacity and willingness to service financial obligations to public sector enterprises or similar official creditors.

Nevertheless we view the completion of this restructuring exercise, in addition to the restructuring to superannuation funds, as supportive of Sri Lanka’s near-term creditworthiness on its local currency obligations because it will further reduce refinancing needs as well as the government’s interest bill.

In our view, the successful completion of the domestic debt exchange with superannuation funds suggests that the government will continue to service its unaffected outstanding local currency bonds in the near term. However, Sri Lanka remains dependent upon favorable economic developments to continue to meet its financial commitments.

As of May 2023, local currency-denominated Treasury bills and bonds outstanding were approximately LKR14.1 trillion, or about 60% of GDP. Sri Lanka’s restructuring exercises on some of these obligations will not affect the size of the outstanding debt stock because there is no haircut on the value of the notes. Banks, which were not included in the domestic debt exchange program on local currency bonds, are estimated to hold approximately 27% of Treasury bills and 43% of Treasury bonds.

Although Sri Lanka’s ongoing restructuring efforts will help to stabilize the government’s fiscal dynamics, net general government indebtedness will remain at a very high level of more than 100% of GDP through at least 2026, in our assessment. Likewise, we estimate that the government’s interest burden will be more than 70% of revenues for 2023, and will remain above 50% in 2026. These outcomes will be highly dependent on the pace of nominal GDP growth, fiscal consolidation and revenue growth, prevailing interest rates in the economy, and future restructuring outcomes, among other variables.

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SLPP enjoying “great demand” from potential presidential candidates: Namal

FILE PHOTO – President Gotabaya Rajapaksa with nephew Namal at the opening of the last part of the Southern Expressway/PMD

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) enjoys “great demand” from potential presidential candidates, and the party will have to take a call on working with incumbent President Ranil Wickremesinghe, MP Namal Rajapaksa said.

Speaking to reporters on Thursday December 07, Rajapaksa claimed several names have come up concerning the SLPP’s candidate at next year’s presidential election.

“There is great demand: entrepreneurs, businessmen, politicians, are all there. There are presidents too, ready to come forward with our party,” he said.

“Out of all these people, we will put forward on behalf of our party the candidate that can take the country forward while stabilising the economy,” he added.

Commenting on continued support for President Wickremesinghe, Rajapaksa said the while SLPP at present works with the former in the present government, the party will have to decide whether that relationship continues going forward.

“The matter of whether we work with the United National Party (UNP) in the future – this is not a politics dependent on individuals; the SLPP is a party. We will talk as a party with other parties, but no discussions will be held centred around individuals,” he said.

Rajapaksa noted that Wickremesinghe was the only member of parliament representing the UNP at the time of his election by parliament following the resignation of his predecessor Gotabaya Rajapaksa .

“If we are to collaborate with the UNP in the future, we’ll have to discuss that. Once the party has decided on that, we can get a start on those discussions. Today, we work with the president in the present government,” he said.

Last month, when asked to comment on President Wickremesinghe’s 2024 budget, MP Rajapkasa sounded rather sceptical of the president’s ambitions for turning the crisis-hit economy around.

“We must study the budget. He had presented a lot of these proposals in last year’s budget too. They don’t seem to have been implemented,” Namal Rajapaksa said, speaking to reporters after the budget presentation Monday November 13 afternoon.

Rajapaksa’s father and leader of the SLPP former president Mahinda Rajapaksa, however, spoke in favour of Wickremesinghe’s budget.

Related:

Sri Lanka’s “forward-looking” 2024 budget will instill fiscal discipline: MR

While not without its shortcomings, the older Rajapaksa said, the 2024 budget is a forward-looking one that aims to ensure fiscal discipline and put Sri Lanka on the path to recovery. (Colombo/Dec07/2023)

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Sri Lanka ruling party MP contradicts poll to claim his party is overtaking president’s

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) is rising from the ashes albeit at a slower than anticipated pace, while President Ranil Wickremesinghe’s United National Party (UNP) still commands only 1-2 percent of the vote, an SLPP legislator said.

MP S B Dissanayake, who is not a member of the cabinet of ministers headed by President Wickremesinghe, told reporters on Thursday December 07 that support for any major political party of the island nation is on a downward trend while the SLPP alone is gaining ground.

An independent poll by the Institute for Health Policy (IHP) however shows that this is decidedly not the case. Polling data for October showed that the leftist National People’s Power (NPP) had enjoyed support from 40 percent of likely voters, having dipped 2 percent from September, while the main opposition the Samagi Jana Balawegaya (SJB) stood at 26 percent, increasing four percent from 22 percent in September. President Ranil Wickremesinghe’s UNP’s support decreased marginally to 11 percent in October from September’s 13 percent. The SLPP also saw a decrease to 5 percent from the previous month’s 8 percent.

“You can’t gamble with elections. The election must be held. We always say electrons must be held. The presidential election must be held next year. There is no alternative,” said Dissanayake.

“Parliamentary elections can be called if needed. But that’s not how it is with the presidential election. Nominations for that will have to be called by September, October next year,” he added.

Asked by a reporter if the SLPP is ready for elections, Dissanayake acknowledged that support for his party had eroded, to nothing.

“We crashed to zero. We were turned to ashes. But we will rise from those ashes. We’re not where we thought we were. The 6.9 million [votes received at the 2019 presidential election] no longer applies. We’re at about half of that. But we’re rising, like this,” he said, gesturing upwards.

“As other major parties go in the opposite direction, we’re rising slowly. But the UNP is not. It’s still on the ground, and still at 1 to 2 percent,” he claimed.

“The SLFP is there too. Those who left us are the same. Even together they cannot form 1 percent. But we’re climbing,” he said. (Colombo/Dec07/2023)

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Sri Lanka president appoints main opposition MP advisor

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has appointed MP Vadivel Suresh as a Senior Advisor aimed at “fostering the integration of Hill Country Tamils into Sri Lankan society”, the president’s office said.

A statement from the President’s Media Divison (PMD) said Suresh’s “pivotal role will centre around overseeing the comprehensive integration of Hill Country Tamils, particularly focusing on the districts of Badulla, Nuwara Eliya and Rathnapura”.

“The Senior Advisor will play a key role in coordinating various initiatives related to the welfare of Plantation Companies, the promotion of women, safeguarding children, addressing disparities in Tamil schools and upgrading the delivery of health services,” the statement said.

In May this year, Suresh, who represents the main opposition Samagi Jana Balawegaya (SJB) in parliament and also serves as the general secretary of the Lanka Jathika Estate Workers’ Union, made headlines when he issued an ultimatum to opposition and SJB leader Sajith Premadasa, demanding an apology for a perceived slight on the Indian-origin Tamil community that Suresh represents. He also spoke favourably of President Wickremesinghe, hinting at a possible cross over.

Sri Lanka’s Indian-origin Tamils, most of whom have historically worked in the plantation sector and live in dire conditions on wages widely considered unacceptably low. Speaking at a May Day rally, the Badulla district MP said Premadasa must apologise to the estate Tamils for allegedly snubbing them at an event in Madulsima that he failed to attend.

“I would like to say to our leader, sir, do not take us for granted,” said Suresh.

“If you need us to stay with you, come right now to Madulsima and apologise to my people and then we shall restart our journey. Otherwise I won’t be part of that journey. There will be no Vadivel Suresh. If you don’t apologise to my people, I won’t be with the SJB,” he said.

Making matters worse, the MP also expressed a willingness to join President Wickremesinghe if he was able to raise the daily wage of plantation workers and resolve their grievances. He also said the president has been successful in containing the disruptions caused by the currency crisis.

“On this May Day, we say to both the opposition leader and the president, I and my people would join hands with a leader that worked to increase [estate workers’] wages and give them [access to the Samurdhi welfare scheme] and include them in national policy,” he said. (Colombo/Dec07/2023)

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