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Monday March 4th, 2024

Sri Lanka’s Bank of Ceylon viability rating on watch on recapitalization

ECONOMYNEXT – Fitch Ratings has placed a viability rating of state-run Bank of Ceylon on rating watch negative, pending possible recapitalization for losses from state enterprise funding, while confirming a long-term rating at ‘CC’.

Sri Lanka’s budget for 2024 set aside 450 billion rupees for possible recapitalization of state banks.

“This recapitalisation plan, should it materialise to address potential capital erosion, may constitute extraordinary support,” Fitch said.

“In accordance with Fitch’s Bank Rating Criteria, extraordinary capital support to restore viability would be viewed by Fitch as “bank failure” and would lead to the bank’s VR being downgraded to ‘f’ but subsequently, upon recapitalisation, be upgraded to a level commensurate with its standalone credit profile.”

Sri Lanka’s Ceylon Petroleum Corporation was forced to borrow dollars from state banks including when fuel was market priced in 2018, as foreign exchange shortages emerged from rate cuts enforced with inflationary open market operations to target potential output, critics have pointed out.

Full text:

Fitch Affirms Bank of Ceylon’s IDRs; Places Viability Rating on Rating Watch Negative

Fitch Ratings – Colombo – 29 Nov 2023: Fitch Ratings has placed Bank of Ceylon’s Viability Rating (VR) of ‘cc’ on Rating Watch Negative (RWN). At the same time, Fitch has affirmed BOC’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘CC’. The rating does not carry an Outlook because of the potential for high volatility at this rating level, in line with Fitch’s rating definitions. Fitch has also affirmed BOC’s LongTerm Local-Currency IDR of ‘CCC-‘ with a Stable Outlook, and the Short-Term IDR at ‘C’.

BOC’s national ratings were not considered in this review.

A full list of rating actions is at the end of this commentary.


Downside Risks to VR: The RWN on the VR reflects risks to BOC’s standalone credit profile from potential capital stress stemming from the restructuring of loans granted to state-owned entities. The government budget unveiled on 13 November 2023 allocated LKR450 billion for the recapitalisation of two state banks, including BOC, to ensure financial system stability.

This recapitalisation plan, should it materialise to address potential capital erosion, may constitute extraordinary support. In accordance with Fitch’s Bank Rating Criteria, extraordinary capital support to restore viability would be viewed by Fitch as “bank failure” and would lead to the bank’s VR being downgraded to ‘f’ but subsequently, upon recapitalisation, be upgraded to a level commensurate with its standalone credit profile.

IDRs Affirmed as Default Risk Unchanged: We have affirmed BOC’s IDRs at current levels as the potential development has not changed our view on the bank’s ability service its foreign-currency and local-currency obligations. BOC’s Long-Term Foreign-Currency and Short-Term IDRs continue to reflect a high risk of default from the sovereign’s restructuring of debt.

Risks to OE Subsiding: Fitch revised the outlook on Sri Lankan banks’ operating environment (OE) to stable from negative to reflect our view that downside risks to the OE have largely abated following the successful completion of the sovereign’s localcurrency debt restructuring and the meaningful improvement in economic variables relative to the significant deterioration last year. We expect the economic recovery to improve banks’ operational flexibility in the near to medium term.

Debt Restructuring Weighs on Capitalisation: We think the potential restructuring of debt of state-owned enterprises that has been assumed by the government could have a significant impact on the bank’s capital position, as reflected in the allocation of LKR450 billion by the government for the recapitalisation of the state banks, including BOC.


Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

We expect to resolve the RWN on BOC’s VR when the impact to its capital becomes more apparent, which may take longer than six months.

If the proposed restructuring of state debt leads to a material capital shortfall that necessitates recapitalisation by the authorities to restore viability or the granting of any regulatory capital forbearance regarding such a shortfall, Fitch would downgrade BOC’s VR to ‘f’ and subsequently, upon any recapitalisation, upgrade it to a level commensurate with its standalone credit profile, likely driven by it risk profile and capitalisation.

A downgrade of the VR may not necessarily lead to a downgrade of the Long-Term Foreign- and Local-Currency IDRs.

Fitch would downgrade BOC’s Long-Term Foreign- and/or Local-Currency IDRs if we perceive there is an increased likelihood that the bank would default on or seek a restructuring of its senior foreign- and/or local-currency obligations to non-government creditors.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

There is limited scope for upward rating action on the VR given the RWN. Fitch may resolve the Rating Watch with an affirmation if we view that large capital shortfalls that threaten the bank’s viability are not likely to arise.

An upgrade of BOC’s Long-Term Foreign- and/or Local-Currency IDRs would most likely result from an improvement in the sovereign’s credit profile, which could occur after the successful restructuring of the sovereign’s external debt.

State Support Unlikely: The Government Support Rating of ‘ns’ reflects our assessment that there is no reasonable assumption of government support being forthcoming.

The Government Support Rating is constrained by the sovereign rating. An upward revision is possible, provided the sovereign’s ability to provide support significantly improves. However, this appears unlikely in the near-to-medium term.


The operating environment score of ‘ccc-‘ is below the ‘b’ category implied score due to the following adjustment reason: sovereign rating (negative).

The business profile score of ‘ccc-‘ is below the ‘b’ category implied score due to the following adjustment reason: business model (negative).

BOC has a 1.78% equity stake in Fitch Ratings Lanka Ltd. No shareholder other than Fitch, Inc. is involved in the day-to-day rating operations of, or credit reviews undertaken by, Fitch Ratings Lanka Ltd.


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


BOC has an ESG Relevance Score of ‘4’ for Governance Structure due to ownership concentration, with a 100% state shareholding and several related-party transactions with the state and state-owned entities, which has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

BOC has an ESG Relevance Score of ‘4’ for Financial Transparency. It reflects our view that the recent regulatory forbearance measures announced by the Central Bank of Sri Lanka could distort the true solvency and liquidity position of the bank, thereby limiting financial transparency. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit

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Sri Lanka rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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