Sri Lanka’s port deal with China to boost forex reserves, credit positive: Moody’s

ECONOMYNEXT – Sri Lanka’s sale of a port to China for 1.1 billion dollars will boost foreign exchange reserves, helping repay some debt falling due, Moody’s, a rating agency said.

"Earnings from the Hambantota Port stake sale will feed into the central bank’s foreign-exchange reserves, which will help bolster investor confidence and encourage future portfolio inflows," Moody’s said.

"Importantly, the sale will allow the government to set aside earnings to repay its upcoming debt maturities and reduce its external debt, a key constraint on Sri Lanka’s credit quality. "

External debt maturities in 2019-22 totalled 13.8 billion dollars.

Moody’s said Sri Lanka’s balance-of-payments position remains vulnerable after foreign-currency reserves materially declined in late 2016 and early 2017.

"More recently, reserves have risen somewhat because of capital inflows from international sovereign bond issuance and syndicated loans," the rating agency said.

However other analysts who forecasted the BOP crisis before the rating agencies, say Sri Lanka’s (and other soft pegged regimes) currency problems are related to credit and central bank credit (money printing).

Sri Lanka’s bank credit is falling after rates were raised allowing the central bank to buy dollars, sterilize the rupee proceeds and lock in forex reserves by selling down its domestic asset stock (sterilized forex purchase).

Under a BOP crisis, a soft-pegged central bank will sterilize forex sales (print more money to inject rupees to replace liquidity mopped up through dollar sales), driving credit to unsustainable levels.






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