Rating agency downgrades ruin banks’ funding lines
Rating agency downgrades and forecasts on Sri Lankan economy are messing up potential funding lines for the local banks.
Exasperated bankers are saying that most rating agencies’ warnings Sri Lanka may not meet its debt requirements are stopping prospective international funding lines for them. “Last October we managed to pay the bond interest, but some rating agencies warned that we may not pay. This year a similar incident happened but we still managed to pay. Next month we need to pay US$500 million bond repayment. Again, warnings are saying we may not pay. Each time the rating agencies are prematurely saying the country will default Sri Lanka manages to repay its debt commitments. With such forecasts the rating agencies are blocking our intended funding lines,” a senior banker of a
large commercial bank told the Business Times.
Most recently rating agency, ICRA Lanka Ltd asked the government to seek International Monetary Fund (IMF) assistance as the measures thus far put in place by the Central Bank (CB) and the government to ease the forex crisis didn’t show results and the 6-month road map announced to mitigate the foreign currency liquidity crunch saw limited progress. The bankers point out that rating agencies are not generating any confidence in the Sri Lankan economy. “We were promised $100 million by a certain funding agency over a month ago but they said a final decision will be taken by January. The particular donor said this after a rating agency downgrade. Similar incidents have happened over the past year and the downgrades are really affecting the banking industry as a whole,” another senior banker of a different large bank pointed out.
A CEO of a bank said that multilateral agency donations haven’t grown as much as the banks wanted to, but some funding has come through. We are trying our best to get more.”
The CB on Wednesday said that Sri Lanka expects $2 billion swap facilities from West Asia and other regional central banks and that by the end of 2021 official reserves will remain above $3 billion.
Economists point out the CB is trying to dissuade fear in the markets with announcements of intended funding lines. The CB is trying to bring confidence into the market, but the market will only believe credible sources, an economist said. He further said that confidence-building exercises from political platforms won’t stand in good stead.
He added that swaps and loans are temporary solutions. The country is now in a survival mode and not on a progressive mode, economists say. Also, at what high rates this cash is coming into the country isn’t known by anyone, they add. “What are the compromises we as a country need to make to bring this cash down?” the economist asked.
“This isn’t what the country needs. The solutions for the exchange rate crisis for example are given on a political platform. These solutions are driven by political agendas. What the country needs is a permanent solution, allowing the exchange rate to be demand and supply-driven. A free exchange rate regime and allowing for debt restructuring will see us through. We can accumulate the reserves during the debt deferment period,” another economist explained.
A former ambassador and economic analyst noted $4 to 5 billion cash transfusion needs to come to CB by the end of the month or early next month. “This will bring the exchange rate to Rs. 200. The CB money printing has to stop. We need to allow imports to help the economy to rotate and subsequently impose taxes. We immediately need a new foreign policy to secure credit lines from friendly nations. It is suicidal to be egoistic in this situation.”
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