IIF highlights Sri Lanka’s funding needs for next year

• Says SL needs US $ 500mn in net bilateral or multilateral funding in 1H21 to maintain reserve losses at manageable levels
• SL’s next dollar-denominated ISB is set to reach maturity on July 27, 2021 
• Points out SL’s external outlook has changed significantly, making it difficult for the country to access int’l capital market
• Forecasts a significant erosion of foreign reserves, if the country was unable to obtain adequate official finance 
• However, Finance Ministry expects foreign reserves to improve to US $ 6.5bn by end of this year

By Nishel Fernando
Sri Lanka could manage the upcoming US $ 1 billion international sovereign bond (ISB) settlement in July, next year and current account deficit in the first half of the year, with US $ 500 million in net bilateral or multilateral funding while keeping reserve losses at manageable levels, according to the Institute of International Finance (IIF), a Washington-based global association of the financial services industry.

However, it pointed out that Sri Lanka, along with some frontier markets that are in weaker position, would continue to face funding stress beyond next year.

“Funding for current account deficits and bond amortisation depends crucially on official financing, as market access looks unlikely. Bond amortisation in July could be manageable with US $ 500 million in fresh official financing but complicated otherwise,” the IIF said in its latest report on Sri Lanka’s funding needs for 2021. 
Sri Lanka’s next dollar-denominated ISB is set to reach maturity on July 27, 2021.

If Sri Lanka is able to obtain US $ 500 million in net bilateral or multilateral funding in the first half of next year, the IIF noted that it would be a significant improvement from the net repayments of US $ 500 million in January-August this year.

Unlike in the past, Sri Lanka may not be able roll over its ISBs, due to the restricted market access, resulting from downgrades from global rating agencies.

“Sri Lanka’s external outlook has changed significantly. Continued market access, which helped fund current account deficits for years, came to halt,” the report reads.

Articulating the government’s strategy in foreign debt management, the Finance Ministry recently stressed that it plans to avoid total rolling over of the upcoming maturities, in order to reduce the foreign debt burden over the medium term.

Meanwhile, the IIF noted that the faster rebound in imports next year, coupled with the anticipated slow recovery of the tourism sector, could widen the country’s current account deficit swiftly next year. 

“The risk in the first half of 2021 is that the import recovery and lack of tourism exports widen the current account deficit quickly. In fact, imports were back to normal levels in September already. Monthly trade data are admittedly volatile but they point to clearly wider trade deficits ahead. As in most South Asian countries, remittances were the bright spot, strengthening through the COVID crisis,” it elaborated. 

The IIF warned that Sri Lanka could face with substantial reserve losses, due to the US $ 1 billion ISB settlement in July, if it was unable to obtain sufficient official financing next year.

“Significant and continued non-official flows look unlikely in any scenario. However, local banks may redeploy more of their external assets (US $ 3.3 billion as of 2Q) into Sri Lankan external bonds, due to recent regulatory tax changes,” it added. In such an adverse scenario, the IIF projects Sri Lanka’s official foreign reserves to fall below US $ 4 billion by mid next year. Sri Lanka’s foreign reserves fell to US $ 5.8 billion by end-October, from US $ 6.6 billion as at end-September, following a US $1 billion ISB settlement in October. However, the Finance Ministry expects the reserves to improve to US $ 6.5 billion by end of this year.