Debt rollover chal­leng­ing for FMS amid ris­ing global in­ter­est rates: Moody’s

„Note of cau­tion comes just days after World Bank casts doubts over SL’S abil­ity to roll over debt „Moody’s says evolv­ing global liq­uid­ity con­di­tions pose “key credit chal­lenges” to FMS „SL is a low per capita FM with low in­sti­tu­tional strengths

Daily Mirror (Sri Lanka) - - BUSINESS NEWS -

Just days after the World Bank said pos­si­ble plans by Sri Lanka to roll over its com­mer­cial debt or in­ter­na­tional sovereign bonds (ISBS) will be an uphill task come ma­tu­rity, Moody’s In­vestors Ser­vice yes­ter­day ex­pressed sim­i­lar con­cerns in an en­vi­ron­ment where global in­ter­est rates are ris­ing and liq­uid­ity get­ting tight­ened.

In a re­port on fron­tier mar­kets (FMS) — high­light­ing the prospects and key risks — Moody’s showed how the FMS in the past have raised com­mer­cial US dol­lar sovereign bonds at rel­a­tively favourable rates when the global liq­uid­ity con­di­tions were be­nign. But the rat­ing agency pointed out how the evolv­ing global liq­uid­ity con­di­tions and ris­ing in­ter­est rates now could pose “key credit chal­lenges” to FMS due to el­e­vated debt-ser­vic­ing costs and liq­uid­ity risks.

Ac­cord­ing to Anne Van Praagh, a Moody’s Man­ag­ing Direc­tor, al­though “the abil­ity of in­di­vid­ual FMS to han­dle ris­ing in­ter­est rates and rollover of com­mer­cial debt is dif­fer­en­ti­ated”, she said, “vul­ner­a­bil­i­ties are high­est for those coun­tries where high lever­age com­bines with a con­strained abil­ity by do­mes­tic pol­i­cy­mak­ers to ease mone­tary pol­icy and pre­serve fis­cal flex­i­bil­ity”.

Sri Lanka is a FM, which has the key char­ac­ter­is­tics of low per capita in­come, rel­a­tively fast gross do­mes­tic prod­uct (GDP) growth, open econ­omy re­liant on com­modi­ties ex­ports and low in­sti­tu­tional strengths.

Moody’s de­fines a fron­tier market as a sub-in­vest­ment grade coun­try that re­lies on con­ces­sional fi­nanc­ing, for ex­am­ple, from in­ter­na­tional fi­nan­cial in­sti­tu­tions, for more than 40 per­cent of its fi­nanc­ing needs.

As a re­sult of the re­cent higher com­mer­cial bor­row­ings, FMS now pay more pro­por­tion­ally in in­ter­est pay­ments than emerg­ing mar­kets.

“In 2016, the FMS’ me­dian in­ter­est to rev­enue ra­tio was 8.9 per­cent com­pared with 7.7 per­cent for EMS,” said Moody’s adding that it could go fur­ther up with the ris­ing global in­ter­est rates un­less the rev­enues fail to keep pace.

As con­ces­sional bor­row­ings ran dry, Sri Lanka had to tap in­ter­na­tional cap­i­tal mar­kets mul­ti­ple times since 2017 and the coun­try is now in an ex­ter­nal debt trap where the state rev­enue is barely suf­fi­cient to ser­vice such debt.

The lat­est such sovereign bond is­sue ear­lier this year raised US $ 1.5 bil­lion.

Ac­cord­ing to Moody’s in July, Sri Lanka is due to set­tle an es­ti­mated US $ 13.8 bil­lion in ex­ter­nal debt from 2019 to 2022.

Moody’s mean­while said the strength of in­sti­tu­tions de­ter­mines a sovereign’s abil­ity to counter neg­a­tive shocks, such as a rise in global cap­i­tal costs but in the case of many FMS, weak in­sti­tu­tions con­strain their abil­ity to buf­fer against shocks.

Out of the 36 FMS rated by Moody’s, 75 per­cent sov­er­eigns are rated in the B1-B3 range.

Most have weak eco­nomic and fis­cal fun­da­men­tals and weak in­sti­tu­tions, sug­gest­ing low shock ab­sorp­tion ca­pa­bil­i­ties.

Mean­while, out of the 36 FMS, down­grades have dom­i­nated up­grades and none has climbed up to in­vest­ment grade since a sovereign rat­ing was ini­ti­ated.

Moody’s has a B1 spec­u­la­tive grade rat­ing on Sri Lanka and its out­look was re­vised to ‘Neg­a­tive’ from ‘Stable’ in 2016 due to fis­cal and ex­ter­nal risks.

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