Sri Lanka among most vulnerable economies that strengthens dollar

• Lower unemployment, higher corporate profits have strengthened U.S dollar 
• SL’s vulnerability comes from unsustainable level of foreign debt which is  much higher than its foreign reserves
• SL’s external debt repayments from 2019 to 2022 estimated at US $ 14.5bn
• Government has to repay US $ 4.1bn in foreign debt next year 

As appreciating U.S. dollar is testing the resilience of many emerging and frontier markets this year, Sri Lanka stands among the most vulnerable economies for the dollar’s rising phenomenon, as the country’s debt repayments stand materially higher than its foreign reserves, said Moody’s Investors Service. 

The U.S dollar has been heading north against many major global currencies and the ride has been pretty steep since mid-April as the world’s largest economy is humming with its lowest unemployment and record corporate profits. 

Amid the U.S. Federal Reserve raising interest rates and at least another two hikes are penciled for 2018 – a proof of an improving U.S. economy – investors have been taking out the money from emerging and more fragile frontier markets to invest back in safer U.S securities.

Sri Lanka’s vulnerability comes from its unsustainable level of foreign debt, much higher than its foreign reserve stock, Moody’s pointed out.

By end of May, Sri Lanka’s gross official reserves were about US $ 9.1 billion and since then Sri Lanka raised US $ 1 billion through an 8 – year syndicate loan from China Development Bank and it received US $ 252 million from the International Monetary Fund (IMF).

The island nation also received another US $ 584 million as the final payment for the Hambantota port lease agreement. 

These inflows bring the total reserves up to close to US $ 11 billion by now. 

But the country’s external debt repayments from 2019 to 2022 are estimated at US $ 14.5 billion. Next year, the government has to repay US $ 4.1 billion in foreign debt. 

“While foreign exchange reserves have increased over the past year, pressure on reserves will likely to persist absent sustained capital inflows, as future external debt repayment requirements increase materially in 2019-22. 

Sri Lanka’s high external vulnerability is driven by external payments due over the next year that are materially higher than foreign exchange reserves, as reflected in an EVI of nearly 160 percent”, Moody’s said in a report themed, ‘Stronger US dollar increases credit risks for emerging market sovereigns with large external funding needs,’ stated. 

Sri Lanka’s external vulnerability indicator, which is well above 100 percent, roughly indicates that its short-term debt maturities surpass its official foreign exchange reserves. 

Moody’s maintains a B1 speculative grade rating on Sri Lanka with a Negative rating outlook. 

Meanwhile, Sri Lanka’s government’s gross borrowing requirement of about 20 percent of GDP and foreign currency composition of outstanding debt of about 46 percent also contribute to making Sri Lanka one of the sovereigns most sensitive to external financing conditions. 

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

From January to June Sri Lanka’s rupee has depreciated by 3.51 percent, lower than the currency depreciation witnessed in India (5.14 percent), Pakistan (5.03 percent) and Philippines (5.18 percent).