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Tuesday November 29th, 2022

Sri Lanka’s NSB local rating downgraded after re-calibration

ECONOMYNEXT – Fitch Ratings has downgraded the state-run National Savings Bank to ‘AA+(lka)’ from ‘AAA(lka)’ following a downgrade of the government’s rating to ‘B’ from ‘B+’ which led to a compression of its domestic rating scale towards the lower end.

Fitch said earlier this month that it may not be able to give ‘AAA(lka)’ as many Sri Lankan firms as ealier as the sovereign rating fell to two notches above CCC.

"The revision reflects the change in the relative ranking of NSB’s national rating compared with other Fitch-rated Sri Lankan issuers," Fitch said.

"This is a result of the sovereign’s weakened ability to provide support to NSB, which acts as a constraint on the bank’s rating, even though the sovereign’s propensity to support the bank remains intact."

Sri Lanka’s sovereign rating has steadily fallen from BB- to B amid a large public service, loss-making state enterprises, renewed expropriation, foreign borrowing, and currency depreciation.

The full statement is reproduced below:

Fitch Revises NSB’s National Rating on Sri Lanka National Scale Recalibration

Fitch Ratings-Colombo-15 February 2019: Fitch Ratings has revised the National Long-Term Rating of National Savings Bank (NSB) to ‘AA+(lka)’ from ‘AAA(lka)’. The Outlook is Stable. This follows the recalibration of the Sri Lankan National Rating scale after the sovereign’s Long-Term Foreign-Currency Issuer Default Rating was downgraded to ‘B’ from ‘B+’ with a Stable Outlook on 3 December 2018 (see our commentary Fitch Ratings: Recalibration of Sri Lanka National Rating Scale published 4 February 2019 on www.fitchratings.com).

The rating action is not related to NSB’s credit quality but reflects Fitch’s changes to the Sri Lankan national rating scale.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales.

Other Sri Lankan financial institutions’ national ratings, which are not mentioned in this commentary, have not been affected by the recalibration exercise.

Key Rating Drivers

The revision reflects the change in the relative ranking of NSB’s national rating compared with other Fitch-rated Sri Lankan issuers. This is a result of the sovereign’s weakened ability to provide support to NSB, which acts as a constraint on the bank’s rating, even though the sovereign’s propensity to support the bank remains intact.

The National Long-Term Rating of NSB continues to reflects Fitch’s expectation of extraordinary support from the sovereign due to the bank’s policy mandate of mobilising retail savings and investing them primarily in government securities.

Rating Sensitivities

NSB’s National Rating is sensitive to changes in the relative creditworthiness among Sri Lankan issuers and the level of the country’s sovereign rating.

National Savings Bank; National Long Term Rating; Revision Rating; AA+(lka).

(Colombo/Feb18/2019 – SB)

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A new Sri Lanka monetary law may have prevented 2019 tax cuts?

ECONOMYNEXT – A new monetary law planned in 2019, if it had been enacted may have prevented the steep tax cuts made in that year which was followed by unprecedented money printing, ex-Central Bank Governor Indrajit Coomaraswamy said.

The bill for the central bank law was ready in 2019 but the then administration ran out of parliamentary time to enact it, he said.

Economists backing the new administration slashed taxes in December 2019 and placed price controls on Treasuries auctions bought new and maturing securities, claiming that there was a ‘persistent output gap’.

Coomaraswamy said he keeps wondering whether “someone sitting in the Treasury would have implemented those tax cuts” if the law had been enacted.

“We would never know,” he told an investor forum organized by CT CLSA Securities, a Colombo-based brokerage.

The new law however will sill allow open market operations under a highly discretionary ‘flexible’ inflation targeting regime.

A reserve collecting central bank which injects money to push down interest rates as domestic credit recovers triggers forex shortages.

The currency is then depreciated to cover the policy error through what is known as a ‘flexible exchange rate’ which is neither a clean float nor a hard peg.

From 2015 to 2019 two currency crises were triggered mainly through open market operations amid public opposition to direct purchases of Treasury bills, analysts have shown.

Sri Lanka’s central bank generally triggers currency crises in the second or third year of the credit cycle by purchasing maturing bills from existing holders (monetizing the gross financing requirement) as private loan demand pick up and not necessarily to monetize current year deficits, critics have pointed out.

Past deficits can be monetized as long as open market operations are permitted through outright purchases of bill in the hands of banks and other holders.

In Latin America central banks trigger currency crises mainly by their failure to roll-over sterilization securities. (Colombo/Nov29/2022)

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Sri Lanka cabinet clears CEB re-structure proposal: Minister

ECONOMYNEXT – Sri Lanka’s cabinet has cleared proposals by a committee to re-structure state-run Ceylon Electricity Board, Power and Energy Minister Kanchana Wijeskera said.

“Cabinet approval was granted today to the recommendations proposed by the committee on Restructuring CEB,” he said in a twitter.com message.

“The Electricity Reforms Bill will be drafted within a month to begin the unbundling process of CEB & work on a rapid timeline to get the approval of the Parliament needed.”

Sri Lanka’s Ceylon Electricity Board finances had been hit by failure to operate cost reflective tariffs and there are capacity shortfalls due to failure to implement planned generators in time. (Colombo/Nov28/2022)

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Sri Lanka new CB law to cabinet soon as IMF prior action

ECONOMYNEXT – Sri Lanka’s new central bank law will be submitted to the cabinet as a prior action of International Monetary Fund with clauses to improve governance and legalize ‘flexible’ inflation targeting, Central Bank Governor Nandalal Weerasinghe said.

Under the new law members of the monetary board will be appointed by the country’s Constitutional Council replacing the current system of the Finance Minister making appointments.

“It will be a bipartisan approach,” Governor Weerasinghe told an investor forum organized by CT CLSA Securities, Colombo-based brokerage.

“The central bank’s ability to finance the budget deficit will be taken out. Thirdly the flexible inflation targeting regime will be recognized in the law as the framework.”

The law will also make macro-prudential surveillance formally under the bank.

There will be two governing boards, one for the management of the agency and one to conduct monetary policy.

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