IMF facility may not be an urgent matter – CT CLSA Securities
The need for an International Monetary Fund (IMF) facility may not be required as IMF assistance for countries with economic dynamics similar to Sri Lanka has risen only when Gross Official Foreign Reserves (GOFR) has fallen below the US$ 5 billion mark, CT CLSA Securities (Pvt) Limited stated its latest research note.
With Gross Official Foreign Reserves (GOFR) hovering around US$ 7.4 billion as at 31 August 2020, thus even after allowing the upcoming International Sovereign Bond ( ISB) settlement of US$ 1 billion to be off-set through GOFR, Sri Lanka is likely to be left with a balance of US$6.4billion, which may not require the need of IMF assistance, it stated.
On 28 Sep 2020 Moody’s Investors Services (MIS) downgraded the Government of Sri Lanka’s (GoSL) long-term foreign currency issuer and senior unsecured ratings to Caa1 from B2 whilst changing the outlook to Stable.
Moody’s rating Action Commentary (M-RAC) and the recent analysis of the Sri Lankan economy by an International Investment Bank (IIB) point towards Sri Lanka’s rising interest cost to revenue ratio. They indicate the fact that overall interest cost to revenue ratio that is hovering a shade below 50% is a relatively high number, and thus is not sustainable for an economy of SL’s nature in the medium to long term.
Whilst the facts remain as they are, we believe an analysis of this nature to assess the sustainability of debt should ideally asses the foreign debt service component as a percentage of revenue, which is the component that any Government cannot defer as other options are available for domestic debt for a sovereign nation.
Given that Sri Lanka’s foreign debt service to overall revenue ratio is still at manageable levels (less than 15%), and owing to the fact that Sri Lankan Government has indicated its willingness to move gradually to domestic debt in the medium term, CT CLSA Securities do not foresee a debt default risk from the Government of Sri Lanka in the near to medium term.
With the GoSL indicating to honour its ISB maturing on 4 Oct 2020, and given healthy GOFRs as of now, we believe it will allow the Government with almost two-thirds majority to come up with a 2021E fiscal budget that focuses on reforms (especially in the SOE segment).
According to CT CLSA Securities, a policy framework that allows growth of domestic-business sectors to substitute imports whilst focusing on export growth is key in formulating such a fiscal budget as COVID-19 could possibly be turned into a blessing in disguise for economies such as Sri Lanka.