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SL not on verge of default: Central Bank

10 Feb 2022

 
  • Issues statement one day after ‘FT’ UK publishes warning article
  • Adds it is committed to maintain unblemished record of debt service
  A day after Financial Times (FT) of UK published an article under the headline “Sri Lanka on brink of sovereign bond default, warn investors”, the Central Bank of Sri Lanka (CBSL) reassured the local and international investor community and the public that the Government and the CBSL are committed to honour all forthcoming debt obligations and thereby maintain Sri Lanka’s “unblemished” record of debt servicing. The CBSL, in its press release, rejected all claims that Sri Lanka is on the verge of sovereign default as unsubstantiated claims containing what the CBSL described as “obviously factual inaccuracies despite the availability of credible official data published by the CBSL according to international standards”.  “Sri Lanka successfully settled the $ 500 million international sovereign bond (ISB) that matured in January despite the adverse speculation in certain quarters that such a settlement would not be possible. In fact, with the repayment of ISBs totalling $ 2.5 billion from January 2020 onwards, the total outstanding ISBs have now reduced to $ 12.6 billion and will reduce to $ 11.6 billion by July, broadly in line with the Government’s strategy to reduce ISB debt gradually to around 10% of the GDP,” stated the CBSL. On 8 February, FT reported that investors are braced for Sri Lanka to default during the Covid-19 pandemic, saying that they expect Asia’s top high-yield bond issuer to restructure its debt and call on the International Monetary Fund (IMF) for assistance as its financial crisis worsens. It added that the South Asian island was plunged into crisis after a cascade of rating downgrades, following large tax cuts in 2019 and the loss of tourism during the pandemic, leaving it unable to tap global markets, and noted that Sri Lanka owes $ 15 billion in bonds, mostly dollar-denominated, of a total $ 45 billion long-term debt, according to the World Bank. It needs to pay about $ 7 billion this year in interest and debt repayments, but its foreign reserves have dwindled to less than $ 3 billion. Further, the article stated that the Government’s next big challenge is a $ 1 billion bond repayment due in July. If it fails to pay, it would join countries including Suriname, Belize, Zambia, and Ecuador in defaulting on its debt following the pandemic. “They are demonstrating an amazing willingness to pay,” said Allianz Global Investors Emerging Market Debt Head Richard House. “But why they would want to, I’m a bit flabbergasted. They are bankrupt, pretty much.” He added: “They are wasting precious forex reserves. It’s just delaying the inevitable.” It stated that Sri Lanka’s Finance Minister Basil Rajapaksa, told FT last month that the country was “trying all options” to avoid default. But its dollar-denominated bonds are trading at near-half their face value, a level that implies a high probability investors will not be repaid in full. “At these levels, a restructuring over the next 12 months should be the base-case scenario,” said BlueBay Asset Management Emerging Market Debt Head Polina Kurdyavko. “I find it difficult to see them muddling through this year.” Sri Lanka first tapped bond markets more than a decade ago, taking advantage of western investors’ thirst for high-yielding assets as it sought to finance reconstruction following a civil war that ended in 2009. The CBSL claimed that they together with the Government have taken necessary measures to secure alternative forex inflows via a number of bi-lateral and multi-lateral funding arrangements to meet the upcoming debt obligations, including the $ 1 billion ISB maturing in July. Therefore,  with the realisation of the expected forex inflows and the resulting build-up of international reserves, the CBSL believes that the Government would be able to ensure the settlement of its sovereign debt without any interruption or default. Hence, the CBSL claimed there would be no need for initiating discussions with investors on debt restructuring. The press release further stated: “The CBSL wishes to inform the public and the investor community not to be misled by such inaccurate stories, misleading opinions, and deliberate misinterpretations spread by certain parties with vested interests who are fuelling speculation regarding Sri Lanka’s capacity to service its future debt obligations.” According to CBSL statistics the country’s official foreign reserve assets fell to $ 2.4 billion by the end of January from $ 3.1 billion in December 2021. This includes the $ 1.5 billion Chinese swap and the recent Indian $ 400 million swap. Liquid foreign currency reserves amount to $ 2.1 billion. However, critics of the Government claim that the $ 1.5 billion Chinese swap can be used only for trade purposes with China. Therefore, usable liquid foreign currency reserves as per the critics amounts to only a mere $ 0.6 billion.    


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