Central Bank strongly challenges Moody’s ‘latest rating decision’
View(s):The Central Bank (CB) on Wednesday strongly challenged a decision by Moody’s Investors Service (Moody’s) on Monday (November 20) to downgrade the Government of Sri Lanka’s foreign currency issuer and senior unsecured ratings from B1 (Negative) to B2 (Stable).
The CB said the downgrading does not properly reflect the country’s macroeconomic fundamentals, and (was) therefore unwarranted.
Sri Lanka’s macroeconomic position has neither deteriorated nor has there been any policy slippage since Moody’s last rating decision in July 2018, in spite of the recent developments in the country’s political sphere, the CB said in a strong rebuttal of the Moody’s rating.
“In fact, based on satisfactory programme performance, the Sri Lankan authorities and the International Monetary Fund (IMF) reached staff-level agreement following the fifth review of the Extended Fund Facility (EFF) programme on October 26 and the agreement was to be announced on October 29. The programme discussions are currently on hold, pending clarity on the political situation,” the CB said.
It said Sri Lanka’s current level of gross official reserves (GOR) amounting to US$7.2 billion is sufficient for the country to meet its external debt obligations in the period ahead. In addition, as a precautionary measure, the CB has initiated negotiations with central banks of friendly nations with regard to obtaining foreign currency SWAP facilities of sizable amounts.
These measures will further strengthen the country’s foreign reserve adequacy, and would enable timely servicing of external obligations while intervening cautiously in the foreign exchange market to prevent a disorderly adjustment of the exchange rate. In addition, the fiscal and macro prudential measures that are already in place are expected to result in an improvement in the external trade balance as well, thus reducing pressure on external reserves and the exchange rate, the CB noted.
Arrangements have already been made to ensure Sri Lanka’s track record of meeting debt obligations on time is sustained. In order to meet the Government’s external liabilities of International Sovereign Bond (ISB) maturities of $1 billion in January 2019 and $500 million in April 2019, the authorities have already built a buffer fund from proceeds of the divestment of Hambantota port and the syndicated loan of China Development Bank (CDB). The space provided under the Active Liability Management initiative not exceeding a limit of Rs. 310 billion also provides for building required buffers and spaces to meet future debt service payments. In addition, the issuance of Sri Lanka Development Bonds (SLDBs) of around $750 million to $1 billion during the remainder of the year and in early 2019 is now at an advanced stage of completion.
“These investments would be sourced through enhanced credit lines for state banks from West Asia and East Asia, together with remittance and tourism related inflows. In addition, the $500 million enhancement, in February 2019, to the syndicated loan obtained from the CDB is also on track. This means that by February 2019 more than $2 billion will be mobilised. This would more than cover all the ISB payments due in 2019. In addition the buffer can be further built up through $600 million expected as disbursements from bilateral and multilateral agencies during next year,” the CB statement said.
Meanwhile, domestic financing conditions have shown considerable improvement through spaces created and debt management strategies introduced recently. This has reduced the roll-over requirement of Treasury bonds and SLDBs in 2019, 2020 and in the medium-term. The Treasury bond maturities, which amounted to over Rs. 600 billion in 2018, are lower in 2019 and 2020, amounting to around Rs. 450 billion and Rs. 290 billion, respectively. Similarly, SLDB maturities, which amounted to around $2.3 billion in 2018, have also been reduced to around $0.62 billion and $0.82 billion in 2019 and 2020, respectively. Further, the new acquisition of government securities by the banking sector has increased by only 1.5 per cent in 2018 as against the trend increase of around 5 per cent in recent years. These developments along with resource availability among institutional investors highlight the substantial space that exists to meet financing requirements from the domestic market.
Continued fiscal consolidation, particularly with the positive primary balance and the Active Liability Management initiatives, are expected to further strengthen the government’s fiscal operations in 2019 and in the medium term.
“Given these parameters, the CB is of the view that the recent rating action by Moody’s is unwarranted. Such an action only on the premise of heightened political uncertainty, with no evidence of slippages in macroeconomic policies, cannot be justified,” the statement added.
| Moody’s downgrades Sri Lanka’s ratings to B2 | |
| Moody’s Investors Service (Moody’s) on Tuesday downgraded the politically-troubled Sri Lankan Government’s foreign currency issuer and senior unsecured ratings to B2 from B1 and changed the outlook to stable from negative. The decision to downgrade the rating to B2 is “driven by Moody’s view that ongoing tightening in external and domestic financing conditions and low reserve adequacy, exacerbated most recently by a political crisis which seems likely to have a lasting impact on policy even if ostensibly resolved quickly, have heightened refinancing risks beyond levels anticipated when the rating agency affirmed the rating at B1 with a negative outlook in July”, the rating agency said in a public announcement. Moody’s said its projections include a slower pace of fiscal consolidation than assumed in July to reflect disruption to fiscal policy implementation in a period of political turmoil. The stable outlook denotes balanced credit risks at the B2 rating level. Moody’s expectation is that, despite the current political crisis, any future government will remain broadly focused on implementing important fiscal, monetary and economic reforms that would strengthen the credit profile over the medium term. However, Moody’s assessment is that the government’s debt refinancing will remain highly vulnerable to sudden shifts in investor sentiment in a period of further tightening in financing conditions and political and policy uncertainty, with limited buffers to face such risk. “Concurrently, Moody’s lowered the local-currency bond and deposit ceilings to Ba2 from Ba1. The foreign currency bond ceiling was lowered to Ba3 from Ba2 and the foreign currency deposit ceiling was lowered to B3. Sri Lanka’s low foreign exchange reserve coverage of large external debt repayments over the next five years exacerbates its reliance on external bilateral and commercial lenders’ willingness to refinance maturing debt. The risks related to that structural external vulnerability are rising in an environment of tightening financing conditions globally and, most recently, heightened domestic political tensions which threaten to undermine international investors’ confidence and the flow of foreign capital, from private markets and international bilateral lenders, into Sri Lankan financial assets,” it said. Tightening external financial conditions and domestic political instability are resulting in capital outflows and placing increasing pressure on the exchange rate and foreign exchange reserves. Combined, these factors are raising the value and cost of external debt. If prolonged, tightening global financial conditions and domestic political instability could hinder the government’s access to global capital markets, curb foreign direct investment inflows to the country and reduce funding from international lenders. Such conditions would undermine the sovereign’s ability to meet its large external repayment obligations. The government will need to make principal payments on external debt that could be as high as $4 billion per year between 2019 and 2023, in addition to financing part of the budget deficit externally, Moody’s added. Moody’s estimates that Sri Lanka’s External Vulnerability Indicator (EVI), the ratio of external debt payments due over the next year to foreign exchange reserves, will be about 180 per cent in 2019 and 2020, higher than previously expected and much higher than the median level for B-rated sovereigns. Moody’s said going forward, the government may pursue a range of financing options, including international US dollar bond issuance, yuan and yen-denominated bond issuances, and loans from China (A1 stable), West Asia or other bilateral and multilateral lenders. These options may somewhat mitigate but are unlikely to materially reduce refinancing risks, as ongoing tightening in financing conditions raise uncertainty around the timing and availability of funding sources. A steady and credible implementation of planned fiscal and economic reforms would improve Sri Lanka’s ability to sustain investor confidence through the upcoming period of large debt maturities. However, the likelihood of the government pursing its reform agenda on the previously planned schedule has fallen following recent political events that have interrupted the reform momentum. Moody’s does not expect the current political crisis to be fully resolved rapidly, and the crisis is in any event likely to leave its mark on the pace and content of the reform programme. Even if past episodes of political disruption have not changed the broad direction of reforms in Sri Lanka, delays in the pace of reform will at a minimum limit the government’s ability to respond to changing market conditions. Moody’s said the stable outlook denotes balanced risks at the B2 rating level. Against the backdrop of ongoing political turmoil, there may be changes or delays to policies that could result in a slower pace of fiscal consolidation in the short term. However, Moody’s expects the broad direction of policy will remain focused on gradually narrowing fiscal deficits and lowering government debt, independent of political shocks. The government had planned further reforms to broaden and deepen its revenue base and pursue binding fiscal rules, including implementing a medium-term debt strategy and establishing a debt management agency. |