Sri Lanka Debt Concerns Rise After S&P Downgraded More Deeply On Junk

A Sri Lankan worker works at a construction site for a new apartment building in Colombo in February 2020 | Photographer: Ishara S. Kodikara / AFP / Getty Images via Bloomberg

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Colombo: Markets are showing growing concern over Sri Lanka’s ability to manage its debt burden, amid financial deterioration that triggered a deeper downgrade on Friday.

The country’s dollar bond prices show that while traders expect securities to be repaid next year, they are increasingly concerned about dwindling cash reserves for debt accounts going forward.

Notes due in 2021 are indicated at approximately 88 cents, based on prices compiled by Bloomberg. That is a level that shows some misgivings but no alarm. But securities maturing in 2023 are around 66 cents, while it is even worse for those maturing in 2030 at 57 cents.

“Longer-term bond prices reflect higher risks, due to a projected decline in foreign exchange reserves to repay 2021 bonds,” said Ek Pon Tay, senior manager of emerging markets debt portfolio at BNP Paribas Asset Management in Singapore. The divergence in ticket prices also shows long-term uncertainty about access to bilateral or multilateral funding sources, he said.

Sri Lanka’s credit rating was lowered to CCC + from B- by S&P Global Ratings on Friday. The credit counselor said the pandemic has significantly affected the government’s ability to generate profits through sectors such as tourism.

For its part, the Finance Ministry said last month that the country will collaborate with investment and development partners and implement the necessary measures to accumulate reserves through non-debt inflows. Gross official reserves are expected to improve to around $ 6.5 billion by the end of 2020 in the expected swap deals and term financing from the China Development Bank in December, it said.

But a recovery in imports, as the South Asian island nation recovers from a Covid-induced economic contraction, while tourism earnings remain stagnant with international borders closed, could increase the current account deficit next year said the Institute of International Finance in a report. week.

“Financing for current account deficits and bond amortization depends fundamentally on official financing, as market access seems unlikely,” he said.

In recent months, Moody’s Investors Service and Fitch Ratings also cut Sri Lanka’s credit rating, even as the government repaid a $ 1 billion international bond from its foreign exchange reserves in October.

Sri Lankan authorities have dismissed the long-term concerns. Central Bank Governor Weligamage Don Lakshman said last week that “fears around Sri Lanka’s debt sustainability appear unfounded,” amid the island nation’s adoption of a fiscal consolidation route. starting in 2021 and the increased emphasis on domestic debt to finance budget deficits.

“Perhaps the only saving grace for bondholders, especially those with a more immediate maturity, is that the government has publicly reiterated that the government has no plans to default and has never defaulted,” wrote analysts at Citigroup Inc. led by Johanna Chua in a report this week.-Bloomberg

Read also: Chinese research vessels in Sri Lankan waters come under the lens of the Indian Navy

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