An Echelon Media Company
Thursday March 23rd, 2023

Sri Lanka sovereign bond holders not looking for domestic hair-cut

SUPPRESSED VOLATILITY: After rates are suppressed with open market operations or monetizing maturing debt (the domestic re-financing requirement) triggering forex shortages,

ECONOMYNEXT – Sri Lanka’s private creditors are not looking for authorities to impose a haircut on domestic debt but a re-profiling to ensure that gross financing targets are met, sources with knowledge the situation said.

According to a letter purportedly sent by India to the IMF which is now in the public domain, Sri Lanka expects to maintain its gross financing need (GFN) made up of deficit financing and old debt roll-overs remain below 13 percent of gross domestic product in the period 2027-32.

The annual foreign financing has to be below 4.5 percent of GDP, leaving 8.5 percent for domestic debt.

The financing requirement has shot up to over 30 percent of GDP now, based on recent disclosures, which has to be gradually brought down through re-structuring, GDP growth and lower new accumulation of debt with a smaller deficit.

Related Sri Lanka’s IMF debt analysis includes domestic debt

However, there are concerns that the GFN target cannot be met given the domestic debt volumes and current interest rates without a domestic debt re-structuring.

To the extent that domestic debt is not re-structured foreign investors would be required to take a bigger hit.

Private investors are prepared to consider a menu of options involving maturity extension as well as some principal reduction provided, if they have confidence in final outcome of the re-structuring plan, sources said.

Investors are not looking for a principal hair cut on domestic debt, but a re-profiling (extending maturities) to meet the 8.5 percent GFN requirement of the IMF deal and a plan to address current high interest rates which tend to balloon debt in the future, sources said.

Sri Lanka – and countries with impossible trinity or dual anchor monetary regimes now called flexible exchange rates- where money and exchange policies conflict generally have high nominal interest rates and inflation, which are absent in single anchor regimes (clean floats or hard pegs).

Hard pegs for example have interest rates marginally higher than the anchor currency – usually 50 to 100 basis points.

Sri Lanka’s interest rates, which have to be hiked periodically after liquidity injections trigger forex shortages, have tended to collapse shortly after a successful float and the approval of an IMF deal, negative private credit, reduced losses of energy utilities, and a lower budget deficit from tax hikes.

Interest rates can fall to single digits about 3 years after a currency crisis.

However, this time the currency depreciation is steeper than in previous crises (from 182 to 370 to the US dollar) and there has been no explicit float to restore the credibility of the peg to the market, though external stability has been restored after phasing out liquidity injections.

In December bought 102 million dollars more than it sold in running a peg at 360/370 to the US US dollar but confidence in the currency peg has not been restored in the market.

Exporters are still not selling forward actively.

In past crises rates usually start to fall a few months into the IMF program and domestic banks which have curtailed private credit are flushed with liquidity from the foreign asset purchases of the central bank, pushing call rates to the bottom of the corridor.

Banks usually pile into government bonds as private credit turns negative, and make capital gains as rates fall about a year into the IMF program.

In this currency crisis cycle due to domestic debt re-structuring concerns and high risk perceptions, cash plus banks have deposited money in the central bank window.

The central bank recently closed the window to encourage banks to buy bills or lend in the interbank market.

Authorities have said a domestic debt re-structuring will hurt banks.

Related Any Sri Lanka domestic debt to be part of negotiation process: CB Governor

Some Sri Lanka banks have bought longer term bonds at very low rates and are most at risk. Banks are expecting regulatory forbearance and staggered accounting relief to cope.

Sri Lanka has already hiked taxes, to reduce the budget deficit and President Ranil Wickremesinghe has also announced spending-based consolidation, departing an earlier plan of expanding the state under revenue based fiscal consolidation, allowing retirements to reduce the public sector.

He has also announced privatization plans. Sri Lanka’s nominal tax revenues have climbed partly due to inflation and negative real rates (a phenomenon known as High Inflation and Financial Repression) which delivers a real or dollar based hair cut on domestic debt. (Colombo/Jan31/2023)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka establishes committee to investigate aircraft incidents

An aircraft lands at the Jaffna International Airport, which was opened in October 2019 and promises to push the tourism frontiers in Jaffna.

ECONOMYNEXT: Sri Lanka’s has established an expert committee under the state-run Civil Aviation Authority to investigate aircraft accidents and to implement precautionary methods in the Sri Lankan airspace, an Official said.

“Even if it is only one flight, there is a chance an accident may occur,” Civil Aviation Authority of Sri Lanka, Director General, P. A. Jayakantha said.

“This particular committee is there to investigate aircraft accidents and act as a mechanism to take over if something goes wrong”.

Sri Lanka has encountered around 2,700 minor aircraft accidents and incidents mostly on the ground in the 19 years through 2021, the CAA annual reports showed.

The new committee will analyze the past accidents and take precautionary measures while also conducting investigations and provide independent reports in the future, Jayakantha said.

The team is provided with required training and qualifications by the CAA along with an International organization, free of charge.

“Internationally also it is a requirement to have a team to investigate the aircraft accidents,” Jayakantha added.

“For a long time we have not fulfilled this requirement and that is why we established this team with the cabinet approval. Moreover, recently, Sri Lanka’s two aircrafts, one training aircraft and a commercial aircraft met an accident”

The committee will be on active duty, until the Accident Investigation Act is passed and a proper Aircraft Accident and Incident Investigation Bureau is established. (Colombo/ Mar23/2023)

Continue Reading

Sri Lanka bond yields steady, Rupee 319/325 at close

ECONOMYNEXT – Sri Lanka’s treasury bond yields closed steady on Thursday while rupee closed weaker, dealers said.

A 01.07.2025 bond closed at 30.60/31.00 percent on Tuesday, down from 30.25/75 percent on Wednesday.

A 15.09.2027 bond closed at 27.80/28.10 percent, steady from 27.90/28.00 percent from Wednesday.

Sri Lanka rupee closed at 319/325 against the US dollar depreciating from 318/320 from a day earlier. (Colombo/ March23/2023)

Continue Reading

Sri Lanka shares dive to two-week low on local debt restructuring fears

ECONOMYNEXT – The Sri Lanka market fell for a fourth session to a two-week low on Thursday, led by financials, as worries over domestic debt restructuring continued after the IMF loan was approved earlier this week resulting in investors adopting a wait-and-see approach until further clarity was provided, analysts said.

The main All Share Price Index (ASPI) closed down 1.38 percent or 131.07 points to 9,395.98, lowest since March 02.

Analysts said, majority of the banks have been on slower investment trends on fears of domestic debt restructuring after the IMF approval and waiting for more clarity on the local debt restructuring.

“The market is on muted sentiments despite the IMF loan being approved and is going through a period of consolidation,” Ranjan Ranatunga of First Capital Holdings said.

The market saw a net foreign outflow of 298 million rupees and the total offshore inflows recorded so far in 2023 to 3.3 billion rupees.

The most liquid index, S&P SL20, closed 1.64 percent, or 45.33 points, down at 2,722.94.

The market saw a turnover of 3.4 billion rupees on Thursday, above this year’s daily average of 1.8 billion rupees.

This is the highest turnover generated since March 08, which is when the market was driven off of positive sentiments from International Monetary Fund deal hope after Chinese assurances.

Top contributors to revenue was Agalawatte Plantations, on off board transactions of a stake change, contributing revenue of 1.6 billion rupees, Ranatunga said.

Top contributors to revenue industry wise was Food and Beverage and Telecommunications.

Sri Lanka Telecom has been seeing positive uptrends as the Secretary to the Treasury has informed the Board of Directors of Sri Lanka Telecom PLC (SLT) and Lanka Hospitals PLC that the Cabinet of Ministers has granted approval in principle for the divestment of the stakes held by the Treasury Secretary in the two companies.

Top losers were Sampath Bank, Hatton National Bank and Commercial Bank.

Sri Lanka is looking at options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announce them the International Monetary Fund said in a report.

Banks have been witnessing profit taking and selling pressures after continuous uptrends prior to the IMF loan had been approved.

Analysts said, selling pressures is expected to ease as the IMF hopes to reduce inflationary pressures which will in turn lead to reductions in interest rates. (Colombo/Mar23/2023)

Continue Reading