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Tuesday May 30th, 2023

Sri Lanka private creditors mull GDP-linked downside bond for debt re-structure

ECONOMYNEXT – An offer to exchange Sri Lanka’s defaulted bonds with a new sovereign security which will pay less if the island’s future economic growth is lower than expected, is under consideration among investors, sources said.

Sri Lanka defaulted on its external debt in April 2022 after printing money to target what state economists said was a ‘persistent output gap,” after growth fell in the wake of two currency crises triggered in the process of injecting liquidity to target 5 percent inflation.

Sri Lanka’s private and official creditors have to re-structure debt, that will bring the gross financing need (GFN) or the total debt rolled over and new deficit financing down to 13 percent of gross domestic product from 2027 to 2032, under an International Monetary Fund backed plan to get the country out of bankruptcy.

Of that foreign debt service is 4.5 percent of GDP.

However, many private foreign creditors believe that Sri Lanka’s projected growth of around 3 percent in the few years by the International Monetary Fund are too pessimistic, according to sources with knowledge of the discussions.

A lower GDP number would also squeeze the 4.5 percent foreign debt service ceiling, pushing foreign creditors to take deeper losses than they would take if actual growth was higher.

If the macro-economic framework particularly the GDP and the foreign exchange projections, are “reasonable” bondholders would close a deal very quickly, perhaps as early as June 2023, sources said.

If there are disagreements over growth projections, negotiations could drag on for “years” as creditors waited to see whether actual growth would be higher than projections.

A way out of the potential deadlock would be to issue a new bond linked to economic performance, generally known as a State Contingent Debt Instrument or SDCI.

“By tying the payments of restructured debt contracts to future outcomes, SCDIs may reduce conflicts over current valuations and facilitate more sustainable agreements between creditors and debtors,” according to an IMF paper in which Sri Lanka’s Senior Mission Chief Peter Breuer was a co-author.

In past sovereign workouts, an SCDI called a value recovery instrument (VRI) which will pay more if a country outperformance projections, have been used.

VRI are not bonds, but warrants and had been shunned by most bond investors. They were traded close to zero at the beginning and were not index eligible. As a result, bond investors had to sell them, perhaps ate a loss usually to hedge funds, reducing their attractiveness.

“Fixed-income investors have typically steeply discounted these “equity-like” instruments given their nonstandard designs, illiquidity, and idiosyncratic risk profiles; hence they have often provided poor value for their cost to borrowers,” according to the paper.

What is now contemplated by some bondholders is not a VRI but a bond, which will start out with more optimistic assumptions. Its cashflows will fall if actual growth falls to levels projected by the IMF.

“In Surinam and Zambia the difference expectations or projections by the IMF and creditors have led to a deadlock in the re-structuring negotiations,” the source said.

“I hope we will be able to avoid it and we can find a compromise.”

Over 75 percent of Sri Lanka’s current bond holders are estimated to be long term investors who had bought bonds close to par including at launch, according to the source.

“That is why they are not going to agree to silly economic assumptions,” the source said. “That is why also in case there is no way to bridge the gap between expectations, the re-structuring could last years.”

Public IMF projections show a growth of around 3.1 percent in the next few years. When Sri Lanka started flexible inflation targeting cum output gap targeting, the country’s ‘potential output’ was calculated at over 5.0 percent. (Colombo/Mar22/2023)

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India extends under utilized $1 bln credit facility to Sri Lanka by one year 

ECONOMYNEXT – India has extended a $1 billion credit facility to Sri Lanka by another year after the loan that was given to help the crisis-hit island nation to continue import of essentials was not fully utilized in the 12 month period originally agreed, officials said.

Sri Lanka faced with a looming sovereign default signed the credit facility in March 2022 for one year through March 2024. However, the full $1 billion had not been utilized yet.

The Facility has been used for urgent procurement of fuel, medicines, food items and industrial raw materials, as per the requirements and priorities of Sri Lanka.

“The initial agreement was signed in 2022 March and out of the 1000 million US dollars allocated materials were imported for $576.75 mil,” Shehan Semasinghe, State Finance Minister said in his official twitter platform.

“The agreement is extended for the remaining $423.25 mil. We will prioritize the import of essential medicines till March 2024.”

Indian High Commission in Colombo said the State Bank of India (SBI) has extended the tenure of the $1 billion Credit Facility provided to Sri Lanka in response to a request from the Government of Sri Lanka.  (Colombo/May 30/2023)

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Sri Lanka President cleared to discuss cancelled LRT after soured Japan relations

ECONOMYNEXT – Sri Lanka’s Cabinet of Ministers approved a proposal by President Ranil Wickremesinghe discuss resuming a Japan funded. Light Rail Transit (LRT) project cabinet spokesman said, as the island nation is in the process of mending ties with Tokyo.

However, any such deals are likely to take place after the debt restructuring and Sri Lanka starts to repay its foreign loans to come out of default, analysts say.

Former President Gotabaya Rajapaksa unilaterally cancelled the 1.5 billion US dollar LRT and East Container Terminal (ECT) projects in 2021. Japan agreed to fund the LRT project while it was one of the tripartite members of the ECT project along with India and Sri Lanka.

The abrupt cancellation hit the diplomatic ties between the two countries and Sri Lankan government officials have said Japan had given the project to Sri Lanka at a very lower financing cost.

President Wickremesinghe returned from Japan late last week after having met top officials of the Japanese government including its prime minister.

“In recent history, due to the stopping of several agreements and proposals suddenly, President Wickremesinghe went to Japan after creating the background to clear some of the worries we have,” Cabinet Spokesman Bandula Gunawardena told the weekly media briefing.

“Before he went, he got the approval from the cabinet to resume the discussion on the light railway project. He got the approval from the cabinet to get parliament approval for bilateral agreements signed or any other investments project. Any change or cancellation of a project could be done only with the approval of the parliament.”

Japan has backed Sri Lanka under Wickremesinghe’s presidency after the island nation declared sovereign debt default. (Colombo/May 30/2023)

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Sri Lanka to tighten grip on television with broadcast law

ECONOMYNEXT – Sri Lanka has formulated a broadcast authority law to regulate electronic media which will be made public soon, Cabinet spokesman Minister Bandula Gunawardana said.

“The draft prepared by a cabinet subcommittee under Justice Minister Wijedasa Rajapaksa has discussed with various parties will be given to all media institutions and broadcast media,” Gunawardana said.

“We do not have to hide or force anyone. A legal framework that can be acceptable to all for all sectors.”

“In a week or two Minister Wijedasa will discuss with state and private stakeholders.”

At the moment Sri Lanka has issued frequencies without conforming to an “international procedures”, he said.

In Sri Lanka television frequencies are issued under a state television act.

Successive administrations in Sri Lanka has since around 1980 mis-used state television duopoly which including for conducting elections according to critics.

Private television as well a raio emerged around the 1990s and has since over shadowed state media.

There have been calls by ruling party politicians from time to time to control private media. There is now calls to control social media.

At a Committee on Public Accounts meeting of the Department of Government Information, ruling coalition legislators called for regulation of television content. (Colombo/May30/2023)

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