SL debt restructuring inevitable: JB Securities

01 Feb 2021

SL debt restructuring inevitable: JB Securities

01 Feb 2021

Whether Sri Lanka goes to the IMF (International Monetary Fund) or not, an economic adjustment is essential, as it will break the country’s cycle of persistent deficits and increase potential growth, JB Securities’ recent economic research note states. The report added that without it, creditors will be sceptical about the country’s intent to honour its future obligations and thus be reluctant to accept the terms of the restructure and it will also result in reputational damage that will hinder Sri Lanka’s return to international credit markets. While approaching the IMF for the 17th time would be a convenient solution for Sri Lanka, the institution’s mandate prevents it from lending to countries that have unsustainable debt levels without their undertaking a light restructuring. The report added that IMF backing would also give a restructuring more credibility, as the feasibility, monitoring, and quantum of the adjustment will be determined by the IMF as part of its programme. Restructuring is the process of removing the debt overhang which impedes investment and subsequently growth. The longer a debt overhang persists, the larger the eventual magnitude of restructuring that is required. Ultimately, the longer it is postponed the higher the likelihood of a hard/unilateral restructuring (default) which tends to come with higher costs. According to the report, this is because it entails a larger haircut for the remaining creditors and places a higher burden on those holding the longer term maturities. Furthermore, a hard restructuring of foreign debt has the potential to spill over into the banking sector as banks hold approximately $ 4.2 billion of ISBs (International Sovereign bonds) and SLDBs (Sri Lanka Development Bonds) as of 30 September 2020 – approximately 22.8% of the total outstanding (Figure 8), the current amount would differ due to new investments and maturities. The tax-exempted status of these instruments, and high yields on ISBs due to the deep discount that they traded at in the secondary market, have incentivised them to increase their holding relative to pre-Covid-19 levels. If capital buffers are insufficient to absorb the loss on assets in the event of a default, a “bail in” by depositors may be required, further inhibiting growth by disrupting domestic financial markets. JB Securities added that an early restructuring can reduce the cost, as it enables a soft default and the debtor can proactively engage with creditors and reach a consensual solution which is seen as market-friendly. The longer maturity ISBs are currently trading at a high 36% discount to face value, largely due to the lack of a credible plan to address the country’s unsustainable debt levels. The clarity following a reprofiling is likely to reduce this discount. As a three-year moratorium on principal and interest will result in a 19-21% reduction in Net Present Value (NPV), the current trading price is likely to improve, which will benefit existing bondholders. While most governments fear defaults due to the ensuing collateral damage caused to the country, GDP contractions are often seen prior to the restructuring and show a gradual recovery immediately after. Referring to the challenges in restructuring, JB Securities noted that multilateral institutions such as the Asian Development Bank (ADB) own 23% of Sri Lanka’s foreign debt (end-2019). These institutions are considered senior creditors, as lending is often concessional with longer repayment periods. Thus, they have preferential status and are often exempt from reprofiling. Bilateral creditors are next in seniority and make up 17.7% of foreign debt. Japan remains Sri Lanka’s largest bilateral creditor as of 2019 (9.7%) having supplied concessional funding in the past. Meanwhile, India and China are also meaningful creditors to Sri Lanka (2.4% and 2.2% of foreign debt, respectively). China is owed a further 7.4% of foreign debt via project loans extended by EXIM (Export-Import) Bank of China. “The Government has also issued Sri Lanka Development Bonds (SLDBs) which are USD-denominated securities issued in the local market. As of the end of September 2020, the top 11 domestic banks held approximately 86% of total outstanding SLDBs ($ 2.6 billion), which stood at $ 2.7 billion as of year-end. Additionally, these banks held approximately 12.2% of outstanding ISBs (September 2020), though it is unclear how much of this was the bonds that matured in October,” it added. The report further added that should the market perceive the restructuring as unfriendly due to the debtor attempting to engineer terms that are more lenient than required, the damage to a sovereign’s long-term reputation will be considerable, and it will take longer to access international credit markets. It is important to provide sufficient relief for the debtor country without making creditors feel that the terms are excessive and confiscatory.

Kapruka

Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!

SL debt restructuring inevitable: JB Securities

SL debt restructuring inevitable: JB Securities

More News..