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Wednesday December 7th, 2022

Sri Lanka’s LB Finance ‘A-(lka)’ rating confirmed

ECONOMYNEXT – Fitch Ratings has confirmed a ‘A-(lka) rating of LB Finance was Sri Lanka’s third largest finance leasing company saying had satisfactory capital levels but it was exposed to a weak economic environment, and customer segments that were more vulnerable.

The outlook was stable.

The company’s five-month gross non-performing loan ratio worsened to 6.1percent in the first quarter of the financial year from 3.9 percent last year driven mostly by vehicle financing and gold loans where collections were hampered by lockdowns.

LB’s stage 3 (impaired) loans ratio, including facilities over 90 days due, had increased to 11.4 percent by end-FY21 from 10.7 percent at end-FY20.

“Asset quality risk remains a key concern for overall credit profiles of FLCs such as LB due to their high exposure to customer segments that are more susceptible to deteriorating economic conditions,” Fitch said.

“Fitch expects asset quality pressures to persist in the near to medium term, due to credit migration amid a challenging operating environment.”

Fitch Affirms LB Finance at ‘A-(lka)’; Outlook Stable

Fitch Ratings – Colombo – 01 Sep 2021: Fitch Ratings has affirmed LB Finance PLC’s National Long-Term Rating at ‘A-(lka)’. The Outlook is Stable.

At the same time, Fitch has affirmed the company’s Sri Lankan rupee-denominated senior unsecured debt at ‘A-(lka)’ and rupee-denominated subordinated debt at ‘BBB(lka)’.

KEY RATING DRIVERS

NATIONAL RATINGS AND SENIOR DEBT RATINGS

LB’s National Long-Term Rating is driven by its intrinsic financial strength and reflects its established domestic franchise as Sri Lanka’s third-largest finance and leasing company (FLC), accounting for 10% of total FLC sector assets as of the financial year ended March 2021 (FY21).

It also reflects high profitability from high-yielding products and satisfactory capital levels. This is counterbalanced by a high-risk appetite due to a large and increasing exposure to gold-backed lending.

The operating environment in Sri Lanka remains challenging. Sri Lanka’s real GDP contracted by 3.6% in 2020 on disruption stemming from the coronavirus pandemic. Fitch forecasts an economic rebound in 2021 and 2022, but this depends on how the pandemic evolves. Our assessment of the operating environment for Sri Lankan FLCs also incorporates the negative implications for FLCs through the effects on their largely sub-prime clientele and the prolonged restriction on motor vehicle importation.

Fitch is of the view that LB’s risk appetite remains high with rising exposure to gold-back lending. We expect this exposure to further increase in the near to medium term, compensating for the slowdown in its vehicle financing business.

LB has so far managed its gold loan exposure through regular monitoring and risk control measures, such as ensuring that adequate safety margins are maintained. However, we believe that potential volatility in global and local gold prices together with local exchange rates could pose a threat to LB’s asset quality.

Asset quality risk remains a key concern for overall credit profiles of FLCs such as LB due to their high exposure to customer segments that are more susceptible to deteriorating economic conditions.

Fitch expects asset quality pressures to persist in the near to medium term, due to credit migration amid a challenging operating environment.

The company’s five-month gross non-performing loan ratio deteriorated to 6.1% in 1QFY22 (FY21: 5.4%, FY20: 3.9%), driven mostly by its vehicle financing portfolio and gold loans where collections were hampered due to the country-wide lockdowns during that period.

LB’s stage 3 (impaired) loans ratio, including facilities over 90 days due, increased to 11.4% by end-FY21 from 10.7% at end-FY20.

Fitch expects a recovery in LB’s profitability in the medium term, although slower loan book growth, thinner net interest margin and high credit costs could continue to affect near-term profitability. LB’s core profitability metric – pretax profit/average assets – declined to 6.4% in 1QFY22 (FY21: 7.6%, FY20: 7.0%) due to a drop in yields amid
protracted low loan growth as a result of the lockdown that prevailed during the period, which outweighed the benefit of continued downward deposit repricing.

Fitch expects LB’s debt/tangible equity to remain broadly stable through FY22-FY23, supported by the still healthy internal capital generation that is likely to outpace the funding growth stemming from a potential pick up in loan growth. LB’s leverage ratio improved to 3.7x by end-FY21 (FY20: 5.0x) and remained at these levels in 1QFY22 as its funding base contracted on muted lending alongside consistent internal capital generation. However, LB’s leverage ratio remains one of the highest among large and mid-sized Fitch-rated FLCs in Sri Lanka.

Fitch expects LB’s funding and liquidity profile to remain adequate, supported by an established domestic franchise. We expect LB to rely on mostly deposit funding (1QFY22: 80% of funding) alongside secured, wholesale, term borrowings from banks and other funding agencies (17% of total funding).

LB’s senior debentures are rated in line with the company’s National Long-Term Rating, as they rank equally with claims of the company’s other senior unsecured creditors.

SUBORDINATED DEBT

The subordinated debentures are rated two notches below LB’s National Long-Term Rating to reflect the subordination to senior unsecured obligations, in line with our Bank Rating Criteria. Fitch’s baseline notching of two notches for loss severity reflects our expectation of poor recovery. We have not applied additional notching to the notes for non-performance risk, as they have no going-concern loss-absorption features, in line with Fitch’s criteria.

RATING SENSITIVITIES

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

Upside to LB’s National Long-Term Rating in the near term is limited due to the pressure on the operating environment. In the medium to longer term, an upgrade is contingent on LB achieving lower leverage relative to peers, lower-risk asset exposure and a sustained improvement in its liquidity position when loan growth picks up meaningfully.

LB’s senior and subordinated debt will be upgraded if the company’s National Long-Term Rating is upgraded

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

A downgrade of LB’s National Long-Term Rating would most likely arise from a weakening in its overall credit profile relative to the national-rating universe of Sri Lankan rated entities. This could result from a deterioration in asset quality beyond our base-case expectations leading to weaker profitability and higher capital impairment risks.

LB’s senior and subordinated debt will be downgraded if the company’s National Long-Term Rating is downgraded.

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon
seasons.

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the
vessel.

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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Sri Lanka President says 2015-2019 policy struggle was ‘warfare’

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe said his attempts to reverse the inward-looking protectionist policies and fix state finances during his last term as Prime Minister was opposed both by politicians and business interests.

“In the 4.5 years as prime minister it was an effort to take this economy out in a different direction,” President Wickremesinghe told an economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“We were able to get a surplus in the primary budget. But it was warfare.

“Politicians wanted to protect their power, businessmen wanted to protect their profits and many others wanted to see what the country would provide them free of charge.”

Wickremesinghe was unable to bring private investment to the port under apparent internal political opposition. Relations with President Maithripala Sirisena also soured and he appointed his own economic advisors.

Meanwhile Wickremesinghe’s free trade agenda was hit by monetary instability as the central bank printed money under flexible inflation targeting and triggered forex shortages which were followed by trade controls.

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Sri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

Sri Lanka President calls to expand Nixon shock as rupee falls

Wickremesinghe’s ‘Yahapalana’ administration also went on a spending spree called ‘100-day program’ in 2015 triggering a currency crisis in 2015/2016 as the central bank printed money to suppress rates.

The central bank however had already started injecting liquidity and losing reserves (by terminating term repo deals) from the fourth quarter of 2014 as domestic credit recovered from a 2012 currency crisis before his administration came to power.

The rupee fell from 131 to 152 and stabilization policies led to an output shock. The International Monetary Fund then taught the agency which had already depreciated the currency from 4.70 to 152 to the dollars seeking bailouts 16 times, how to calculate an output target.

Under Finance Minister Mangala Samaraweera taxes were raised and budget were fixed in 2018 to bring deficits back to pre-2015 levels, though state spending went up from 17 to around 20 percent of GDP under the spendthrift ‘revenue based fiscal consolidation’ where cost cutting was dropped.

The central bank then printed money by purchasing bonds from banks to target the yield curve, jettisoning a bills only policy established by ex-Central Bank Governor A S Jayewardena, through term reverse repo and overnight injections taking the rupee from 151 to 162 to the US dollar.

The central bank also created money by entering into a swap with the Treasury in 2018, a type of strategy used by speculators to bring down East Asian pegs putting, further pressure on the currency from around July 2018 onwards.

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What went wrong; Sri Lanka’s illiberal economics and unsound money : Bellwether

Stabilization policies then led to another output shock. As forex shortages came Sri Lanka resorted to heavy external borrowing as it was unable to settle maturing loans with domestic borrowings.

After two currency crises and output shocks, macro-economists of the new administration cut taxes saying there was a ‘persistent output gap’ and printed even more money for stimulus (close the output gap). (Colombo/Dec07/2022)

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China calls for joint effort to ease Sri Lanka’s debt burden, no mention of restructure

ECONOMYNEXT — A top Chinese official has expressed hope that countries and multilaterals like the International Monetary Fund (IMF) work with Beijing to play a constructive role in easing Sri Lanka’s debt burden, stopping short of an assurance on debt restructuring.

Chinese Foreign Ministry spokesperson Mao Ning was quoted by international media as saying on Monday December 05 that China attaches high importance to Sri Lanka’s difficulties and challenges.

She was responding to a question on media reports that an IMF team will be in China this week to discuss faster progress on debt restructuring for countries including Sri Lanka, which is negotiating for an IMF bailout.

“On Sri Lanka’s debt issue, I’d like to stress that we support the financial institutions in working out ways with Sri Lanka to properly solve the issue,” said Ning.

“We also hope relevant countries and international financial institutions will work with China and continue to play a constructive role in helping Sri Lanka overcome the current difficulties, ease its debt burden and realise sustainable development,” she added.

She said China has long-standing sound cooperation with the IMF and other international economic and financial institutions.

The spokesperson avoided any mention of debt restructuring, a prerequisite for the IMF extended fund facility (EFF).

Nearly a fifth of Sri Lanka’s public external debt is held by China, according to one calculation. The emerging superpower has been generous in Sri Lanka’s time of need, extending much needed assistance in the form of rice, medicine and other commodities.

The latest arrival in the Colombo port from China was 2 billion Sri Lankan rupees worth of essential medicines and medical supplies, delivered on Tuesday.

However, critics say China is doing everything but what Sri Lanka really needs: agreeing to restructure its outstanding debt.

At least one Sri Lankan opposition MP has demanded that China agree to a restructure.

Related:

Sri Lanka debt restructuring: opposition MP warns of “China go home” protests

Tamil National Alliance (TNA) legislator Shanakiyan Rasamanickam, who had been on the warpath with Beijing over an apparent lethargy in helping the crisis-hit island nation restructure its debt, recently warned of a “China, go home” protest campaign similar to the “Gota, go home” protests that unseated the country’s powerful former president in July.

The MP told parliament last Friday December 02 that Sri Lanka owes 7.4 billion dollars to China, a nearly 20-trillion dollar economy, and if the latter was was a true friend, it would agree to either write off this debt or at least help restructure it.

Colombo has been vague at best on the status of ongoing restructure talks with Sri Lanka’s creditors, and opposition lawmakers and others have expressed concern over what seems to be a worrying delay. Rasamanickam and others have claimed that China, Sri Lanka’s largest bilateral creditor, is the reason for the apparent standstill. (Colombo/Dec06/2022)

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