SL displays tell-tale signs of sovereign default: Reuters

04 Aug 2021

SL displays tell-tale signs of sovereign default: Reuters

04 Aug 2021

Even though Sri Lanka paid a $ 1 billion bond last week (26 July), Reuters reports that the country’s alarming state of its finances suggests it may have been just another step towards its first sovereign default. “All the tell-tale crisis signs are there: bonds at nearly half their face value, debt-to-GDP levels above 100%, over 80% of government revenues being spent on interest payments alone, and barely enough reserves to cover a few months of spending,” Reuters stated. The article was written by Tom Arnold, who covers emerging markets and sovereign wealth funds at Reuters, and Reuters specialist market correspondent Marc Jones. It was also underscored that the chances of Sri Lanka recovering from this situation without assistance is slim as expat remittances from overseas have been limited due to Covid-19, along with revenue generation from the nation’s tourism industry. “Reflecting the gravity of its plight, Colombo’s dollar-denominated government bonds are among the most distressed in the emerging market universe. Yet last week’s bond payment underscored the strong desire of the Government to honour its debt and avoid the ignominy of a first sovereign default,” the analysis highlighted. Accordingly, Sri Lanka’s upcoming major payments are listed below, all on top of a fiscal deficit of around 11%: $ 500 million – January 2022, $ 1 billion – July 2022, and $ 1 billion – December 2023. The Reuters analysis notes that most investors see an International Monetary Fund (IMF) programme as the only route out of trouble, but the Government remains reluctant to go down such a path as it will require “painful” spending cuts. “Instead, it appears to be favouring a muddle-through approach. It is leaning on foreign exchange swaps with China and India – which are both vying for influence in Sri Lanka – as well banking on an upcoming $ 800 million injection of IMF Covid-19 crisis money,” it said. In comments reported by local media last week, State Minister of Money and Capital Markets Ajith Nivard Cabraal said Sri Lanka would make repayments via careful management of its existing reserves, as well as expected inflows. Cabraal also said that the drop in reserves, which has seen them halve to under $ 4 billion in the last 12 months, was temporary. He expects inflows of $ 2.65 billion over the next three months, in addition to a $ 1.5 billion currency swap with China, as well as the rollover of loans maturing in the rest of 2021. Meanwhile, several analysts expressed that they are unconvinced by such statements. “We see the forecasted rise in reserves as overly optimistic,” said Julius Baer Fixed Income Analyst for Asia Esther Yong. “The current measures undertaken are short term in nature and not a panacea for its weak debt sustainability and external position.” “China can lend enough money for them to muddle through, but… are they willing to throw good money after bad?,” said Vontobel Asset Management Manager – Emerging Market Debt Portfolios Carlos de Sousa. Goldman Sachs analysts point out that since 2010, only three of the 13 countries where bond “spreads” spiked to distressed levels for several months managed to avoid a default. “Mathematically, it is very hard for it to continue the way it is going,” Mikhail Volodchenko, a colleague of Lad’s at Axa, said. “For now it is plugging the hole and surviving.” However, Cabraal issued a statement noting that within the next few months, the reserves would rise to over $ 7 billion. He said that the current foreign reserve balance stands around $ 3 billion, highlighting that when considering the expected inflows and outflows, the available reserves would exceed the aforementioned figure. Listing out the inflows, he added that the inflows over the next three months, as per the country’s forex pipeline, amount to nearly $ 2,650 million, which include a swap facility from India worth $ 400 million, a swap from Bangladesh worth $ 250 million, a loan from China Development Bank worth $ 300 million, a special drawing rights (SDR) allocation from the IMF worth $ 800 million, Central Bank purchases from the forex market in the next three months amounting to $ 200 million, inflow from international sovereign bonds (ISBs) held by local banks totalling $ 300 million, and expected inflows from the utilisation of under-utilised assets totalling $ 400 million.

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SL displays tell-tale signs of sovereign default: Reuters

SL displays tell-tale signs of sovereign default: Reuters

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