brand logo

Citi rules out need to tap IMF till 2023

07 Jul 2021

 

  • Renewed positivity due to locals holding $ 2.2 b ISBs

  • Recent funding lines have lowered risk of debt adjustment: Barclays

  Amidst the Opposition pushing the Government to opt for an International Monetary Fund (IMF) programme, Citi Research, in a section of its latest report, revised its previous review by noting that the Sri Lankan Government can hold out timing of any IMF negotiation, and thus debt restructuring risks, until 2023, as locals own “a much larger than expected” $ 2.2 billion in International Sovereign Bonds (ISBs), which Citi projects as short-dated bonds.  “Restatement of debt statistics show locals own more ISBs than expected; we change our base case view and now expect any IMF negotiation will be pushed out to 2023,” it added.  Citi Research noted last December that Sri Lanka’s debt is on an unsustainable path despite the Government of Sri Lanka (GoSL) being in denial of this, and that an International Monetary Fund (IMF) programme is essential to avoid a debt disaster. In its report titled “Sri Lanka Economics and Strategy View”, Citi noted that it cannot see a credible strategy for achieving debt sustainability and (external) repayment capacity. “While officials continue to mention their willingness to pay, we cannot see a credible strategy for achieving debt sustainability and (external) repayment capacity, beyond talking up their growth prospects and expecting this to attract FDI and other portfolio equity inflows. The ability of financial repression to contain domestic borrowing costs is limited by rising debt ratios, still expected to grow amid a pro-growth 2021 Budget,” Citi had noted last year.  “We expect net FDI will finance about 40% of the current account deficit in 2021 FY, and the rest will not be wholly covered by official multilateral and bilateral lending, let alone commercial funding, in the absence of an IMF policy reform backstop.”  Nevertheless, now Citi notes that the amount of ISBs owned by Sri Lankans at the end of December 2020 is a “surprisingly high figure”, despite being restricted from purchasing such instruments since 11 December.  However, it added that foreign exchange reserves forecasts for 2021F seem conservative, but beyond that, it seems overly optimistic in the absence of the IMF, and added that the Central Bank of Sri Lanka’s current account forecasts project a very small deficit in 2021F and a surplus therefore appears “somewhat over-optimistic”.  Meanwhile, Barclays also expressed similar views in its own report issued recently, ruling out a requirement for near-term adjustment of the country’s debt load.  It added that Sri Lankan authorities estimate that roughly $ 2.23 billion of ISBs bonds are owned by domestic investors. As this investor base likely comprises mainly domestic banks, Barclays believes that the holdings are concentrated in the one to three-year tenors (2021-2023), which implies that 30-40% of these bonds are locally owned. Although Sri Lanka’s foreign reserves remain low ($ 4 billion at end-May 2021), it thinks the immediate risk of a debt-adjustment event has eased. This is because Sri Lanka has secured a number of liquidity lines and loans with foreign central banks and agencies, which have eased funding pressures through near-term access to foreign currency. In March, the Central Bank of Sri Lanka and the People’s Bank of China (PBoC) entered into a three-year $ 1.5 billion bilateral currency swap agreement. The China Development Bank agreed to disburse a $ 500 million loan to Sri Lanka in early April, and Sri Lanka secured concessional loans in May from the Economic Development Co-operation Fund (EDCF) and Export-Import Bank of Korea. The loans can be drawn down over 2021-2022 at 0.15-0.20% rates of interest with a repayment period of 40 years, and a grace period of 10 years. In June, Bangladesh Bank approved a $ 200 million currency swap agreement with Sri Lanka. The Central Bank is also reported to be resuming a $ 400 million swap line with the Reserve Bank of India, which it will be able to draw down from August.  Meanwhile, Sri Lanka is also eligible for $ 780-800 million from the IMF’s new allocation of Special Drawing Rights (SDRs). Further, the Bank of Ceylon is expected to receive $ 115 million funding in the coming weeks – $ 70 million from China Development Bank (CDB) and $ 45 million from Asia Infrastructure Investment Bank (AIIB). Barclays expects local banks to roll over at least part of the 2021 ISBs after the bond matures in late July.


More News..