2 June 2021 02:34 am Views - 219
Despite the government’s recent success in securing funding from multilateral or bilateral partners to build up the country’s foreign exchange reserves, S&P Global Ratings this week warned that such credit lines and budgetary assistance alone may not be sufficient to cover all external financing requirements over the next one-year period under the extremely challenging external environment.
“A stronger network of bilateral swap lines will help to augment reserves to some extent… However, we see increasing risks that funding from multilateral or bilateral partners will not be sufficient to cover all external financing needs over the next 12 months,” the global credit rating agency cautioned.
The government recently secured US$ 1 billion worth of concessional loans from China and South Korea. It also entered into a US$ 1.5 billion currency swap deal with People’s Bank of China.
Most recently, the Central Bank of Bangladesh in principal approved a US$ 200 million currency swap with Sri Lanka’s Central Bank (CB), that can be extended up to US$ 500 million.
Further, the country’s foreign exchange reserves are also expected to receive boost of around US$ 780 million from the proposal for new Special Drawing Rights allocation by the International Monetary Fund (IMF).
Sri Lanka’s foreign exchange reserves stood at US$ 4.5 billion at the end of April.
Despite these developments, S&P viewed the government’s external financing conditions to have become even more challenging, due to adverse economic impacts stemming from the on-going COVID-19 pandemic while uncertainty over access to official creditors remains high.
The rating agency also highlighted potential challenges that may materialise in future issuances of domestically issued US$-denominated Sri Lanka Development Bonds (SLDBs).
“While financing conditions in international capital markets remain difficult, the government has been able to issue SLDBs to domestic creditors, particularly domestic banks and eligible corporates. Success in rolling over SLDBs will become increasingly crucial to the government’s debt-servicing capacity. In turn, this will heavily depend on domestic creditors’ ability to access external financing under favourable terms,” it elaborated.
However, S&P affirmed Sri Lanka’s CCC+ sovereign credit rating with a Stable outlook.
Meanwhile, the rating agency showed how the pandemic has further weakened State finances by dampening domestic economic activity and lowering excise duty revenue leaving limited capacity for the government act on.
As a result of tax cuts granted in budget 2021, the S&P expects a long-lasting impact on the fiscal account.
“In the absence of extremely favourable economic and financial conditions, these measures are expected to constrain revenue growth and could be only partially offset by new revenue measures, such as the Special Goods and Services Tax,” it added.
S&P projected the fiscal deficit to remain elevated at 10.2 percent of GDP this year and to decline at a slow pace to 8.4 percent in 2024, on the contrary to government’s expectations.
Moving on, it expects the net general government debt to rise at an average of 10.3 percent per annum during 2021-2024 as a result of the tax cuts. In 2020, government debt already exceeded 100 percent of GDP.
“The government’s interest payment as a percentage of revenues has reached 68.8 percent in 2020–the highest ratio among the sovereigns we rate,” S&P noted.
Although, the country’s access to official funding and accommodative macroeconomic policies are likely to boost domestic demand recovery, S&P pointed out that the current loose monetary policy may lead to an increase in domestic liquidity putting pressure on the exchange rate.
S&P expects the economy to rebound at a slower pace of 3.7 percent this year due to the on-going third COVID-19 wave, recovering from 3.6 percent contraction last year.
Further, the rating agency predicted the current account deficit to rise marginally to 1.9 percent of GDP this year from 1.3 percent in 2020 mainly due to relatively high oil prices.
Moving forward, the country’s external liquidity, as measured by gross external financing needs as a percentage of current account receipts and usable reserves, is projected to average 122 percent over 2021-2024.
The rating agency viewed structural reforms to be crucial in addressing the current issues in implementing the monetary policy, by enshrining CB’s autonomy and capacity with legislative measures, which would ultimately lead to an improvement in the quality and effectiveness of the monetary policy.