Goldman Sachs confident Sri Lanka will “muddle through” near term debt challenges

• Says its calculations point to SL “comfortably” meeting all external obligations falling due in 2021
• Says existing reserves, swap lines and other already announced funding lines sufficient to honour foreign currency obligations falling due this year
• Expects SL to end this year with foreign reserves worth US$ 6.4bn
• But says trajectory beyond 2021 would be more daunting without additional external financing

Goldman Sachs Group Inc. says its calculations point to Sri Lanka “comfortably” meeting all its external obligations falling due in 2021, leaving the country with an estimated US$ 6.4 billion in external reserves by the year-end, although the trajectory beyond that could be more daunting without additional external financing.

As one of the three potential scenarios identified by analysts at the global investment banking giant for Sri Lanka, they expect the country to meet its foreign currency obligations falling due in 2021 through the existing reserves, already announced officials loans and swap lines and expected special drawing rights by the International Monetary Fund (IMF), a scenario which they referred to as, ‘muddle through’.   

The other two scenarios they identified were engaging with IMF for a programme and restructuring the country’s foreign debt.

“Our calculations show that Sri Lanka should comfortably meet its external financing requirements in 2021, and we estimate that effective FX reserves will be US$ 6.4 billion at the end of this year, similar to levels at the end of 2020”, the United States-headquartered investment bank said in its latest report titled, ‘Asia Economics Analyst,’ released this week. 

Sri Lanka faces a near-term crunch in its external liquidity, predominantly caused by the pandemic-induced disruptions on the country’s key inflows via tourism industry and merchandise exports, to a lesser degree. 
For instance the pandemic struck the country when it was poised to earn US$ 4.5 billion plus earnings from the tourism trade. Sri Lanka’s annual foreign obligations through 2026 are estimated at about US$ 4.0 billion, according to a recent Fitch Ratings report.

Even with the near absence of earnings from tourism, Sri Lanka recorded only a billion dollar deficit in its Balance of Payment during the first five months in 2021, signalling a positive balance had a working tourism trade was prevalent. 

Hence while the near-term pressures could be eased to a greater extent through the announced bilateral and multilateral financing arrangements, the medium to long-term pressures could be alleviated though the gradual revival in the tourism trade and the unleashing of the full potential of domestic economic activities, which in return aid merchandise export incomes and other services incomes. 

The embarking on crucial structural reforms to rid the system of red tape, entrenched corruption and inefficiency while bridging the massive skill gap could aid improving ease of doing business. 

The Colombo Port City is poised to act as a springboard to attract the much-required direct investment flows, which will in the long-term reduce the reliance on foreign currency debt for budgetary  support.  

Commenting on the shorter-dated Sri Lankan bonds, which are priced significantly higher than the longer-dated bonds, Goldman Sachs said, “this pricing suggests that markets are assigning a much higher probability to near-term maturities being met, but are unclear on the longer-term prospects. In other words, markets are assuming that Sri Lanka has a reasonable chance of muddling through in the near term”. 

While there are not many countries, which muddle through with stressed bond spreads for significant amount of time, Sri Lanka has been having bond spreads at distressed levels for about 16 months, the highest among the 13 sovereigns which had stressed bond spreads for several months, of which only three avoided default - i.e. Pakistan, Belarus and Tajikistan out of which the former two ended up with IMF programmes. 

Goldman Sachs’ comments largely alleviate the concerns raised by many over the country’s debt serviceability and the warnings issued by Moody’s Investors Service at the beginning of this week that the Sri Lankan sovereign could be further downgraded from the current Caa1 rating ahead of a billion dollar bond settlement later this month.