Moody’s Investors Service (Moody’s) continued to flag Sri Lanka’s weakened foreign debt affordability and increased roll-over risks as the emerging and frontier markets remain highly vulnerable  to the tightening financing conditions globally. 

In a report released last Friday, Moody’s analyzed the contagion risks stemming from the slump in Turkish currency, bonds and stocks, which sparked a renewed asset sell-off in the emerging and frontier economies with twin current account and budget deficits.

Early this month the United States ramped up pressure on Turkey—an emerging market, which depends heavily on exports to the US—by doubling tariffs on Turkish steel and putting curbs on Turkish bank over a detention of a US pastor, who was arrested three months after a failed military coup in July 2016, to oust the Turkish President Recap Tayyip Erdogan. 

This resulted in strengthening of the US dollar and plummeting of the Turkish lira. 

Sri Lanka last week witnessed its highest weekly outflow from government securities, which amounted to Rs.7.5 billion, as foreigners continued to dispose frontier market bonds in the light of rising US treasury yields.  

So far this year, foreigners have net sold Rs.47.4 billion worth of government securities. Sri Lankan rupee has depreciated by 4 percent year-to-date against the US dollar. 

Under these conditions, Moody’s said Sri Lanka’s debt affordability would weaken further if the cost of new debts continue to rise and stay at elevated levels for a prolonged period.

It was only last week citing a Moody’s report Mirror Business said Sri Lanka could face tighter external borrowing conditions as it seeks to roll-over a mammoth US $ 17 billion debt over the next five years. 
Sri Lankan government’s gross borrowing requirement is about 18.5 percent of the gross domestic product (GDP) and foreign currency composition of outstanding debt is at about 46 percent. According to Moody’s, these indicators contribute to making Sri Lanka one of the sovereigns that are most vulnerable to tightening external financing conditions. 

“Mitigating this exposure somewhat, the average maturity of government debt at 5.7 years implies moderate rollover risk.

However, similar to Pakistan, we find that Sri Lanka’s debt affordability would weaken further should the cost of new debt rise and stay at higher levels”, Moody’s said.

Among the other sovereigns most exposed to sudden and sustained rise in cost of debt are in the Middle East, North Africa and Asia Pacific, particularly Lebanon, Egypt, Bahrain, Mongolia and Jordan. 

Meanwhile, Moody’s also has identified Sri Lanka among Argentina, Ghana, Mongolia, Pakistan, Zambia and Turkey as emerging and frontier markets that are most vulnerable to dollar appreciation.  Argentina and Pakistan remained outliers with sharp depreciations of their local currencies by as much as 40 percent and 10 percent, respectively year-to-date and the International Monetary Fund approved a US $ 50 billion bail-out package for Argentina recently to rescue the fragile Latin American nation.