Dwindling foreign...

With around US $ 1.5 billion raised from various sources for the record debt servicing this year, First Capital expects that the government would be able to raise another US $ 3 billion from bilateral loans, currency swaps and funding agencies such as the IMF.

However, Mathew said that Sri Lanka would still face a US $ 1.5 billion shortage, which will have to be settled drawing funds from the country’s foreign reserves.

Similarly, Morgan Stanley also noted that Sri Lanka faces US $ 4.4 billion worth of net drains on its foreign exchange reserves, over the next 12 months.

Further, it noted that the country has US $ 544 million of short swap positions coming due as well.

“Together with US $ 2-2.5 billion worth of current account deficit, the total external funding requirements stand at US $ 7-7.5 billion. Taking into account FDI, the funding needs should stand at around US $ 6.5 billion,” the investment bank stated.

The IMF and Sri Lankan government are currently negotiating to reach an agreement to replace the existing Extended Fund Facility (EFF) arrangement, which is set to expire next month, with a rapid financing instrument, following a request from the government.

Mathew pointed out that it would be crucial for Sri Lanka to have the rapid financing instrument as part of the existing EFF, to delay the repayments of the EFF, which starts from this year.

“It has to be definitely part of the existing EFF; otherwise Sri Lanka will have to start paying back the EFF while the new funds are coming in. Hence, it is likely to be an extended programme of the EFF,” he said.

Meanwhile, the yields of Sri Lanka’s international sovereign bonds (ISB) saw a sharp increase in the secondary market, over the last week.

The yields of US $ 1 billion ISB, which is set to mature this October, rose to 44.42 percent last week, from 39.23 percent in the previous week, reflecting the default fears of international investors.

The bond was issued for the 6.25 percent coupon rate. All ISBS maturing before or in 2025 were trading with yields above 20 percent.

Mathew opined that Sri Lanka is unlikely to issue any ISBS for another year, given the high cost of financing. “That’s completely out for about a year,” he said. Fitch Rating last month downgraded Sri Lanka’s Longterm Foreign- and Local-currency Issuer Default Ratings (IDR) to ‘B-’ with negative outlook.

In its report, Morgan Stanley stated that they now prefer Pakistan ISBS over Sri Lanka’s in the Asian context and Ghana over Sri Lanka in the global context, mainly due to Sri Lanka’s worsening fiscal environment.

“Sri Lanka spreads are currently trading at over 1,000bp, generally considered a stress threshold in the markets. From that perspective, cash prices are also important to look at. Looking at low cash prices for long-end bonds could imply at first glance that they are attractive but upon looking at the peer group comparison, the attractiveness is less obvious,” Morgan Stanley elaborated.

However, the investment bank believes that Sri Lanka’s external funding sources should be sufficient to meet the funding requirement in the near term.

In addition, if the debt suspension by G-20 countries is to be extended to Sri Lanka, the investment bank pointed out that the country could yield debt suspension worth US $ 1.2 billion in 2020, providing great relief and liquidity.