Sri Lanka highly vulnerable to tightening global financing conditions: Moody’s

• SL’s external payments due in 2019 remain materially higher than FX reserves 
• Moody’s advice Sri Lanka to extend average government debt maturities
• Warns current political crisis may undermine chances of refinancing upcoming external debt at affordable costs

Moody’s investor services placed Sri Lanka (B1 negative) among Maldives (B2 negative), Mongolia (B3 stable), and Pakistan (B3 negative), who are particularly vulnerable to tightening external financing conditions, as Sri Lanka’s large external financing needs and substantial foreign currency government debt raise the island nation’s vulnerability.

Sri Lanka’s external payments due over the next year remain materially higher than foreign exchange reserves, reflected in Moody’s forecast of the external vulnerability indicator (EVI) of 161 percent for 2019.

According to the international credit rating agency, the government’s gross borrowing requirement of about 16-20 percent of GDP and significant foreign currency borrowing on commercial terms also make Sri Lanka sensitive to external financing conditions.

Moody’s in its latest 2019 Global Emerging Market Outlook report advised Sri Lanka to lengthen the average government debt maturities to mitigate this risk. 
Moody’s asserted that the current political crisis, which has created uncertainty on the direction of future policy, could have a large and lasting negative impact on international investors’ confidence, undermining the island nation’s ability to refinance forthcoming external debt at affordable costs.

“Credit negative pressures could materialise via weakening debt affordability as external funding costs mount, and/or through the rising value of foreign currency debt as the local currency depreciates. 

Currency weakening could also raise inflation and prompt additional domestic rate rises, which would pass through to local currency borrowing costs and further weaken governments’ fiscal positions,” the authors of the report emphasised. 

However, the Central Bank of Sri Lanka (CBSL) last Wednesday assured that it has lined up various sources of funding to settle the maturing international bonds and other foreign borrowings next year, despite the political turmoil currently brewing in the country.

The Central Bank Governor Dr. Indrajit Coomaraswamy revealed that three state-run banks—Bank of Ceylon (BOC), National Savings Bank (NSB) and People’s Bank (PB) would together raise US $ 750 million to US $ 1 billion from the Middle East before end of this year while noting that the government has decided to upscale the term loan arrangement with China Development Bank by US $ 500 million.

The CBSL hopes to end the year with US $ 7.8bn foreign reserves. 

Due to global trade tensions and liquidity conditions, Moody’s has also cut the median GDP growth in emerging economies in Asia Pacific next year.

“We expect median GDP growth in emerging economies in Asia Pacific to slow to 4.8 percent, following an expected 5.8 percent growth rate in 2018,” said Moody’s Managing Director AtsiSheth. Moody’s expects the escalating trade tensions between China and the US to pose risks through trade as well as investment flows.
“Overall, issuers in countries with domestic macroeconomic or political challenges are more vulnerable to such episodes of global investor risk aversion, while those in countries with stronger growth, deeper financial markets and multiple instruments in their policy toolboxes are more resilient,” Moody’s stated in a press release.