Making it simple
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The financial and stock markets cheered, the business community applauded while sections of the working class looked on with dismay when the latest buzz word – DDO or Domestic Debt Optimisation (also known as Domestic Debt Restructuring – DDR) – hit the headlines last week.To make it simple (helluva effort here), according to expert opinion, Domestic Debt (DD) is the accumulated borrowings of the Treasury from domestic sources – Central Bank, commercial banks, non-bank institutions, funds like EPF, individuals and others. These borrowings are based on issuing government securities – Treasury Bills and Treasury Bonds. These parties buy T-Bills and T-Bonds as investments or savings and give their money to the Treasury – in total Rs. 15 trillion now, which has to be paid by the government budget or tax revenue.
DDR is two-fold: (1) Extending the period of repayment (rescheduling maturity dates of the T-Bills and T-Bonds) in order to make the repayments thinner and spread over a longer period. (2) Reducing the amount borrowed which is either the capital or the interest (which is called coupon rate). Either way, the idea is to cut down part of the debt (called haircut).
Does this explanation suffice to readers of Kussi Amma Sera’s weekly rantings? Maybe some would understand and for this I welcomed Aldoris’s tuk-tuk. The choon-paan karaya was making his twice-weekly rounds and on this Thursday morning halted at the gate where the trio had gathered. And this is how the conversation went, while maalu-paans were passed around.
“Mata-nam mae sevaka arthasadaka aramudala gena thiyena prashna therenne nae (I don’t understand this drama about EPF being affected),” said Aldoris.
“Eka mae aanduwen apahu gevanna thiyena naya prashnayak (It’s about some loan repayments that the government has to make),” said Serapina.
“Eth eka sevaka arthasadaka aramudaley thiyena ape mudal gena-ne (But it’s something to do with our money which is held by the EPF),” noted Mabel Rasthiyadu.
“Aei ekata wada sarala pahadilikirimak neththe (I wish there was a simpler explanation),” added Kussi Amma Sera.
Indeed, while the government has had its say with the opposition vigorously opposing the move, there hasn’t been a simpler explanation given to the DDO and its impact (if ever) on the working class, whom opposition parliamentarians say would be affected via the EPF.
The DDO is one of the fundamental requirements in the US$2.9 billion bail-out package given by the International Monetary Fund (IMF) and another hurdle to overcome is whether it would satisfy our overseas creditors.
Since banks have been under a lot of stress with high taxes, moratoriums on loans and rising impairments (delayed loan repayments), this sector and its depositors have been spared.
Just as I walked back to the office room after listening to the trio and their dilemma of understanding what the DDO and the impact on the EPF mean, the phone rang. It was Ruwanputha, my young economist friend on the line.
“Hi…..good that you called. I was trying to explain in layperson’s terms what DDO means to the readers,” I said.
“Well that’s a tough one. It seems that other than the impact on the EPF, other sectors have been spared,” he said.
“Well from what I understand, those who withdraw the EPF now might have a problem while this would not be the case in the long term,” I said.
“Absolutely. The dilemma of the government was that some segments of the population had to be affected by the DDR and while bank depositors were unaffected, institutional investors of T-Bonds and EPF members would feel the impact,” he said.
While the government has tried to allay the fears of the working class saying the impact of the DDO is marginal, the opposition has cried foul with one explanation indicating that if you withdraw your EPF today and use it to pay for the wedding of a family member, you would be able to invite only 50 guests compared to 100 guests before the DDO.
Opposition MP Dr. Harsha de Silva said the principle of equitable burden sharing has been violated. “We have been told that the amount to be restructured in terms of bonds is only 0.5 per cent of the Gross Domestic Product (GDP) which is quite small. Then it could certainly have been possible to share the burden among all bond holders. There would have been no significant impact on banks and other creditors if light regulatory forbearance was applied,” he has said.
Fitch Ratings said in a statement on Tuesday that the Sri Lankan government’s proposal for the treatment of domestic debt marks a significant step towards resolving uncertainties around the impact of the sovereign’s debt restructuring on the local banking sector, but warned that complications may arise from a number of factors.
The proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will alleviate some of the pressure on their already stressed capital positions from weakening loan quality and the rupee’s depreciation.
“Although the government’s domestic debt treatment announcements go some way towards resolving uncertainties over Sri Lankan bank ratings, many risks remain. It is still unclear, for example, whether the government’s proposals have received support from the sovereign’s key external creditors. If not, the risk of further domestic debt restructuring could linger, resulting in further instability for the banking sector,” Fitch said.
The Colombo stock market on Tuesday welcomed the DDO and its limited impact on banks with one of its best performances in recent times. The main All Share Price Index rose by 6.7 percent or by over 633 points crossing the 10,000 points mark. The dollar was in the Rs. 300-Rs. 305 range this week. Interest rates are also coming down which would have some impact on the markets, as falling interest rates would see a shift from bank deposits to investment in the stock market. Lower interest rates would also result in a rise in loans by the corporate sector and SMEs though there might be a selective process to ensure less non-performing loans among borrowers. On the flipside, depositors would suffer with interest rates coming down.
As I wound up my column sipping another mug of tea, my thoughts were on the likes of Kussi Amma Sera and her friends and the need for a simpler explanation of the DDO and its impact on the masses.
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