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Wednesday December 7th, 2022

Sri Lanka’s Senkadagala Finance ‘BBB+(lka)’ rating confirmed, outlook stable

ECONOMYNEXT – Fitch Ratings has confirmed a domestic ‘BBB+(lka)’ rating of Sri Lanka’s Senkadagala Finance despite pressure on the operating environment, with the firm having lower bad loans than the industry.

Senkadagala Finance has reported gross non-performing loan ratio based on six-month arrears of 7.7 percent by June 2021 which could deteriorate further amid lockdowns.

The firm had set aside set aside loan-loss provisions of about 7.0 percent of gross loans in the fiscal year to March 2021 (FY21), with further provisions of around 1.6 percent of gross loans taken in the first quarter of the current financial year.

Senka’s regulatory six-month NPL ratio also remained lower at FYE21 (6.5 percent) compared with the industry average of 11.3 percetn.

The full statement is reproduced below:

Fitch Ratings – Singapore/Colombo – 01 Sep 2021: Fitch Ratings has affirmed Senkadagala Finance PLC’s (Senka) National Long-Term Rating at ‘BBB+(lka)’. The Outlook is Stable.

KEY RATING DRIVERS

NATIONAL LONG-TERM RATING

Senka’s National Long-Term Rating is underpinned by its standalone credit profile. It reflects the company’s moderate deposit franchise and higher-risk exposure to cyclically sensitive SME borrowers as a mid-sized finance company in Sri Lanka.

These features contribute to the company’s modest profitability and higher reliance on secured wholesale funding relative to peers. Nonetheless, Senka has generally retained a more consistent business strategy and risk appetite relative to lower-rated peers, and its adequately matched asset-liability maturity profile provides some protection against the risk of a liquidity squeeze.

The Covid-19 pandemic continues to exert significant pressure on the operating environment for Sri Lankan finance and leasing companies. Fitch projects a gradual economic recovery in 2021 and 2022 after a 3.6% contraction in 2020 GDP, but this forecast remains subject to considerable uncertainty as it depends on the trajectory of the pandemic.

We expect continued pressure on loan demand, asset quality and profitability in the near term in light of the challenging operating environment.

Senka’s regulatory reported gross non-performing loan (NPL) ratio (based on six-month arrears) remained elevated at 7.7% at end-June 2021, and we see a risk of continued deterioration in the near term if the current lockdown is extended.

Against this, the company set aside loan-loss provisions of about 7.0% of gross loans in the fiscal year to March 2021 (FY21), with further provisions of around 1.6% of gross loans taken in 1QFY22.

Senka’s regulatory six-month NPL ratio also remained lower at FYE21 (6.5%) compared with the industry average of 11.3%.

We expect credit-provisioning pressure to continue to weigh on profitability in the near term. Senka recorded a quarterly net loss in 1QFY22 as higher credit costs outstripped pre-provision profits. Nonetheless, Senka has remained profitable in the past year with pretax profit of around 2.8% of average assets in FY21 (FY17-FY20: 2.2%-5.0%), and profitability is likely to recover if current movement restrictions are eased.

Meanwhile, Senka’s leverage, as captured by debt/tangible equity, remains at the higher end of rated large and mid-sized finance companies, but improved to 4.7x by end-1QFY22 from 5.2x at FYE21 due to an infusion of equity capital by the major shareholders earlier in the year. The company has announced a subsequent rights issue of around LKR475 million, which should help to shore up the capital buffer further. Senka’s core capital adequacy ratio of 17.9% at end-1QFY22 provided a moderate buffer against capital impairment risk relative to the regulatory minimum requirement of 6.5%.

We view Senka’s funding profile as more confidence-sensitive than that of peers, due to its smaller deposit-funding franchise and greater reliance on secured wholesale funding. Deposits comprised a moderate 38% of total funding at FYE21 (large and mid-sized peers:
78%-94%). Its deposit base is also fairly concentrated, raising the risk of lumpy funding outflows. Against this, its longstanding market presence helps to anchor the stability of its large deposit relationships, and the company’s positive short-term liquidity gaps and considerable undrawn liquidity facilities help to offset the risk of a liquidity shock.

SUBORDINATED DEBT

Senka’s Sri Lankan rupee-denominated subordinated debt is rated two notches below its National Long-Term Rating. This reflects Fitch’s expectation of high loss severity and poor recoveries in the event of default, per our Bank Rating Criteria.

RATING SENSITIVITIES

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

NATIONAL LONG-TERM RATING

Positive rating action is unlikely in the near term in light of the difficult operating environment. An upgrade is only possible in the medium to longer term if the company is able to diversify its funding profile and strengthen its deposit franchise and profitability materially, closer to that of larger peers, while maintaining leverage towards the lower end of its peer group.

SUBORDINATED DEBT

Any positive action on Senka’s National Long-Term Rating will lead to similar action on its subordinated debt.

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

NATIONAL LONG-TERM RATING

Fitch may take negative rating action in the event of further persistent asset quality deterioration that results in in material capital impairment, funding pressure or an increase in asset encumbrance.

SUBORDINATED DEBT

The ratings on Senka’s subordinated debt would be downgraded in the event of a downgrade of its National Long-Term Rating.

ISSUER PROFILE

Senka, founded in 1968, is a mid-sized finance company in Sri Lanka. It held a market share of roughly 2.7% of industry assets and 1.5% of industry deposits at end-March 2021.

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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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