Gold­man Sachs con­fi­dent Sri Lanka will “mud­dle through” near term debt chal­lenges

Gold­man Sachs con­fi­dent Sri Lanka will “mud­dle through” near term debt chal­lenges.

Says its cal­cu­la­tions point to SL “com­fort­ably” meet­ing all ex­ter­nal obli­ga­tions fall­ing due in 2021. Says ex­ist­ing re­serves, swap lines and other al­ready an­nounced fund­ing lines suf­fi­cient to hon­our for­eign cur­rency obli­ga­tions fall­ing due this year.

But says tra­jec­tory be­yond 2021 would be more daunt­ing with­out ad­di­tional ex­ter­nal fi­nanc­ing

Gold­man Sachs Group Inc. says its cal­cu­la­tions point to Sri Lanka “com­fort­ably” meet­ing all its ex­ter­nal obli­ga­tions fall­ing due in 2021, leav­ing the coun­try with an es­ti­mated US$ 6.4 bil­lion in ex­ter­nal re­serves by the year-end, al­though the tra­jec­tory be­yond that could be more daunt­ing with­out ad­di­tional ex­ter­nal fi­nanc­ing.

As one of the three po­ten­tial sce­nar­ios iden­ti­fied by an­a­lysts at the global in­vest­ment bank­ing gi­ant for Sri Lanka, they ex­pect the coun­try to meet its for­eign cur­rency obli­ga­tions fall­ing due in 2021 through the ex­ist­ing re­serves, al­ready an­nounced of­fi­cials loans and swap lines and ex­pected spe­cial draw­ing rights by the In­ter­na­tional Mon­e­tary Fund (IMF), a sce­nario which they re­ferred to as, ‘mud­dle through’.

The other two sce­nar­ios they iden­ti­fied were en­gag­ing with IMF for a pro­gramme and re­struc­tur­ing the coun­try’s for­eign debt.

“Our cal­cu­la­tions show that Sri Lanka should com­fort­ably meet its ex­ter­nal fi­nanc­ing re­quire­ments in 2021, and we es­ti­mate that ef­fec­tive FX re­serves will be US$ 6.4 bil­lion at the end of this year, sim­i­lar to lev­els at the end of 2020”, the United States-head­quar­tered in­vest­ment bank said in its lat­est re­port ti­tled, ‘Asia Eco­nom­ics An­a­lyst,’ re­leased this week.

Sri Lanka faces a near-term crunch in its ex­ter­nal liq­uid­ity, pre­dom­i­nantly caused by the pan­demic-in­duced dis­rup­tions on the coun­try’s key in­flows via tourism in­dus­try and mer­chan­dise ex­ports, to a lesser de­gree.

For in­stance the pan­demic struck the coun­try when it was poised to earn US$ 4.5 bil­lion plus earn­ings from the tourism trade. Sri Lanka’s an­nual for­eign obli­ga­tions through 2026 are es­ti­mated at about US$ 4.0 bil­lion, ac­cord­ing to a re­cent Fitch Rat­ings re­port.

Even with the near absence of earn­ings from tourism, Sri Lanka recorded only a bil­lion dol­lar deficit in its Bal­ance of Pay­ment dur­ing the first five months in 2021, sig­nalling a pos­i­tive bal­ance had a work­ing tourism trade was preva­lent.

Hence while the near-term pres­sures could be eased to a greater ex­tent through the an­nounced bi­lat­eral and mul­ti­lat­eral fi­nanc­ing ar­range­ments, the medium to long-term pres­sures could be al­le­vi­ated though the grad­ual re­vival in the tourism trade and the un­leash­ing of the full po­ten­tial of do­mes­tic eco­nomic ac­tiv­i­ties, which in re­turn aid mer­chan­dise ex­port in­comes and other ser­vices in­comes.

The em­bark­ing on cru­cial struc­tural re­forms to rid the sys­tem of red tape, en­trenched cor­rup­tion and in­ef­fi­ciency while bridg­ing the mas­sive skill gap could aid im­prov­ing ease of do­ing busi­ness.

The Colombo Port City is poised to act as a spring­board to at­tract the muchre­quired di­rect in­vest­ment flows, which will in the long-term re­duce the reliance on for­eign cur­rency debt for bud­getary sup­port.

Com­ment­ing on the shorter-dated Sri Lankan bonds, which are priced sig­nif­i­cantly higher than the longer­dated bonds, Gold­man Sachs said, “this pric­ing sug­gests that mar­kets are as­sign­ing a much higher prob­a­bil­ity to near-term ma­tu­ri­ties be­ing met, but are un­clear on the longer-term prospects. In other words, mar­kets are as­sum­ing that Sri Lanka has a rea­son­able chance of mud­dling through in the near term”.

While there are not many coun­tries, which mud­dle through with stressed bond spreads for sig­nif­i­cant amount of time, Sri Lanka has been hav­ing bond spreads at dis­tressed lev­els for about 16 months, the high­est among the 13 sov­er­eigns which had stressed bond spreads for sev­eral months, of which only three avoided de­fault – i.e. Pak­istan, Be­larus and Ta­jik­istan out of which the for­mer two ended up with IMF pro­grammes.

Gold­man Sachs’ com­ments largely al­le­vi­ate the con­cerns raised by many over the coun­try’s debt ser­vice­abil­ity and the warn­ings is­sued by Moody’s In­vestors Ser­vice at the be­gin­ning of this week that the Sri Lankan sov­er­eign could be fur­ther down­graded from the cur­rent Caa1 rat­ing ahead of a bil­lion dol­lar bond set­tle­ment later this month.

Ex­pects SL to end this year with for­eign re­serves worth US$ 6.4bn