Citibank says Sri Lanka’s ability to settle US $ 1bn bond mid next year “less than likely”

•   Says anticipated FDI to Colombo Port City yet to be materialised, despite enactment of Port City Commission Bill
• With no imminent plan to approach IMF, points out that a viable alternative remains elusive 
• But expects Sri Lanka to seek an IMF programme next year to restructure debt
• Casts doubts on US $ 1bn SWAP facility with RBI and significant proceeds from asset sales hinted by govt.

With no considerable foreign exchange inflows in sight, 
Citibank says Sri Lanka’s ability to settle the US $ 1 billion maturing International Sovereign Bond (ISB) in mid next year now seems ‘less than likely’, as the anticipated foreign direct investments (FDI) to Colombo Port City remain yet to be materialised, despite the enactment of the investor-friendly Colombo Port City Commission Bill. “Recent statements by Secretary to President P.B. Jayusandra and State Minister Cabraal suggest there is still no imminent plan to go to the IMF but a viable alternative looks elusive to us. Sri Lanka might continue to repay the US $ 500 million January repayment in hopes that FDI and tourism will turn around but the macro situation could look more challenging by 2Q22 and the ability to still repay US $ 1 billion by July 2022 now looks less than likely,” Citibank said in its latest update on Sri Lanka’s external debt dynamics. 

Citi highlighted the country’s official reserves fell more than expected in July to US $ 2.83 billion, from the US $ 4.06 billon reserve position in the previous month, after settling the US $ 1 billion ISB maturity in late July.

“We think the market was expecting at least US $ 3 billion reserves and possibly higher, with the hope that the Central Bank would be able to absorb some of the local holdings of the US $ 1 billion maturity plus a US $ 250 million SWAP with Bangladesh Bank that was reportedly in operation in July (though it’s not entirely clear if this was already reflected in reserves) but only has a three-month maturity,” it said.

In particular, the report noted that disappointing FDI inflows from the Colombo Port City project may have dashed the government’s expectation to do away with 
the IMF. 

“We were earlier more hopeful of some FDI flows from the Colombo Port City bill and the first phase of the project relating to the sale of land rights but we are increasingly less certain about this, given Sri Lanka’s current macro challenges,” it said.

Citi continued to hold on to the opinion that it is imminent that the country would enter into a programme with the IMF, most likely early next year. “We continue to see Sri Lanka seeking an IMF programme and its associated debt restructuring by 2022, possibly not too long after the January 2022 bond repayment. We had adjusted our view last month (see page 56 of the latest Asia monthly) on the back of a lack of follow-through flows from Colombo Port City, limited inflows and the latest COVID surge that will further dampen the government’s tourism recovery hopes,” it elaborated.  Although the country’s foreign exchange reserves are tipped to get a boost from the IMF’s recent SDR allocation, Citi views it to be a temporary boost. 

Further, the report cast doubts on the US $ 1 billion SWAP facility with the RBI and significant proceeds from the asset sales hinted by the government. With an IMF-backed programme, Citi opines that the country would be well-positioned to restructure its external debt in particular, given that the ISB issued from 2017 has enhanced CAC clauses, which may become easier to restructure than the others.