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Saturday Dec 14, 2024
Saturday, 11 March 2023 01:01 - - {{hitsCtrl.values.hits}}
Fitch Ratings yesterday welcomed the likely approval of the International Monetary Fund (IMF) Executive Board for financing support to Sri Lanka but flagged off several concerns which point to further challenges.
Fitch said that International Monetary Fund (IMF) funding should improve Sri Lanka’s external liquidity but the timing of any debt restructuring agreement with official and private creditors remains uncertain.
Fitch expressed the belief that Sri Lanka is likely to secure financing support from the IMF after the fund’s Executive Board set a date of 20 March to review the $ 2.9 billion staff-level agreement that the country signed with the IMF in September 2022.
“We view the announcement of a date for the Executive Board review as an indication that the IMF regards the financing assurances it has received from key official creditors as sufficiently credible to move forward,” Fitch said.
Sri Lanka’s President on 7 March indicated that China had provided its support, following earlier assurances from India and Paris Club official creditors. The President also indicated that Sri Lanka had completed all prior actions required under the IMF program, although the IMF Board will make its own assessment on this in deciding whether to approve the package.
Fitch said IMF Board approval of the program would release IMF funding and should unlock additional financing from multilateral creditors. This would bolster official foreign-exchange reserves, which have already risen 30% from their trough in October 2022. Nonetheless, reserves remain very low, at $ 2.2 billion in February, equivalent to around one month of imports.
“We expect improved external liquidity to support a broader strengthening of macroeconomic stability. The exchange rate has appreciated since late February 2023. Month-on-month inflation had already moderated over 2H22, but the strengthening of the currency should further restrain price growth if it is sustained,” it said.
Nonetheless, Fitch said potential upsides to Sri Lanka’s economic outlook will remain constrained until its debt restructuring is agreed upon. The prospects for a deal with creditors remain unclear for now.
“We view recent developments as positive for debt negotiations, partly because they suggest that official creditors’ financing assurances are consistent with the parameters of the IMF’s program that seeks to return debt to sustainable levels. However, restructuring talks could continue for a long time yet,” Fitch added.
It pointed to the example of Zambia (Restricted Default, or RD), where an IMF support package was approved by the Board in August 2022 but debt restructuring talks are still ongoing, highlighting this risk. “We believe that even if official creditors are more aligned in Sri Lanka’s case, talks with private-sector creditors could raise further complications,” Fitch said.
It also said the issue of whether to include local-currency debt in any restructuring will be one of the factors complicating debt negotiations.
Fitch downgraded Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to 'CC', from 'CCC', in December 2022, reflecting its view that a local-currency debt default is probable in light of an untenably high domestic interest payment/revenue ratio, high interest costs, tight domestic financing conditions and rising local-currency debt/GDP in the context of high domestic fiscal financing requirements, which authorities forecast at about 8% of GDP in 2022. The Long-Term Local-Currency IDR would be further downgraded if the Government announces plans to restructure or default on its local-currency debt. Fitch rated Sri Lanka’s Long-Term Foreign-Currency IDR at ‘RD’.
“We may move the IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that we judge to have normalised the relationship with the international financial community. Sri Lanka’s post-default ratings would depend upon our assessment of its credit profile. If the key parameters for returning to debt sustainability under the IMF program allow for a moderate and extended debt reduction process, this could facilitate debt restructuring talks, but may weigh on the sovereign’s post-default credit ratings,” Fitch added.
