The Sri Lankan government’s budget highlights the authorities’ commitment to raising fiscal revenues as a share of GDP – an approach that, if successful, would alleviate a long-standing weakness in the sovereign’s credit profile, says Fitch Ratings. 

Issuing a statement, the Ratings Agency said nonetheless, risks to the fiscal outlook remain significant and plans to slow the pace of fiscal consolidation could weigh on prospects for debt reduction over the medium term.

The budget, unveiled on 17 February, is the first since President Anura Kumara Dissanayake of the Janatha Vimukthi Peramuna (JVP) was elected in September 2024, and provides greater clarity over the administration’s medium-term fiscal and economic reform agenda. We view most of the budget announcements as being consistent with our assumptions made during our December 2024 assessment, when we upgraded Sri Lanka’s rating to ‘CCC+’, from ‘RD’ (Restricted Default). The provisional budget deficit outturn of 6.8% of GDP in 2024, for example, was in line with Fitch’s expectations.

The government’s goal of raising revenue/GDP to 15.1% in 2025, from 11.4% in 2023, would exceed our assumptions that the 15% threshold would only be achieved by 2026. The budget incorporates a 36.5% increase in revenue from taxes on external trade and a 13.1% increase in revenues from income taxes. Fitch believes the goal is achievable, given revenue-raising measures already announced and implemented. However, it will depend heavily on a smooth liberalisation of import restrictions, notably for vehicles. There remains a risk that the authorities could look to slow that process if higher imports weaken Sri Lanka’s external stability, for example by eroding foreign-exchange reserves. The medium-term fiscal outlook for Sri Lanka remains challenging, and we believe revenue growth is likely to slow sharply from 2026, unless additional policies are introduced.

Sri Lanka’s public finances remain fragile, and the budget projects a slowing of fiscal consolidation, with the deficit falling only to 6.7% of GDP in 2025. This reflects sharply higher spending on public capex (up by 61%), as well as increases in salaries and wages (up 12%) and subsidies (up 11%). The deficit could be smaller than the government expects if implementing such a large capex increase proves difficult. However, we believe Sri Lanka’s medium-term growth prospects would be impeded if public capex remains at the low levels seen in 2024 (2.7% of GDP), even considering other measures announced in the budget that have the potential to lift private investment in export-oriented sectors and infrastructure.

The budget’s projected pace of consolidation is slower than envisioned in Sri Lanka’s four-year USD3 billion Extended Fund Facility (EFF) programme, agreed with the IMF in 2023. The government still expects to achieve a primary budget surplus of 2.3% of GDP in 2025, in line with the EFF programme targets, while expected interest payments of 8.9% of GDP are significantly larger than anticipated in the programme.

“We assume the divergence from the programme’s projections implied in the budget will not prompt the IMF to suspend disbursements under the EFF,” Fitch ratings said.

However, the slow pace of fiscal consolidation is notable, given that the government’s projected medium-term growth rate of 5% is well above that envisioned in the EFF. Limited progress on debt reduction would weigh on Sri Lanka’s credit profile and could leave the government with little capacity to respond if the economy faces economic shocks. (Newswire)

The post Sri Lanka’s Budget targets growth but faces risks – Fitch appeared first on Newswire.

Fitch Ratings has upgraded the National Long-Term Ratings of 10 Sri Lankan banks following the recent sovereign upgrade and recalibration of the agency’s Sri Lankan national rating scale. 

According to the Ratings Agency, at the same time, Fitch has affirmed the National Long-Term Ratings of five Sri Lankan banks.

The recalibration reflects changes in the relative creditworthiness of Sri Lankan issuers after Fitch upgraded Sri Lanka’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘CCC-‘ on 20 December 2024. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Sri Lanka’s national scale ratings are denoted by the unique identifier ‘(lka)’. Fitch adds this identifier to reflect the unique nature of the Sri Lankan national scale. National scales are not comparable with Fitch’s international rating scales or with other countries’ national rating scales. 

The banks’ National Ratings consider their creditworthiness relative to other issuers in the country. The recalibration of the Sri Lankan National Rating scale has resulted in upgrades of the National Long-Term Ratings of the following banks. The Outlooks remain Stable.

• Bank of Ceylon (BOC) to ‘AA-(lka)’, from ‘A(lka)’
• People’s Bank (Sri Lanka) (PB) to ‘AA-(lka)’, from ‘A(lka)’
• Commercial Bank of Ceylon PLC (COMB) to ‘AA-(lka)’, from ‘A(lka)’
• Hatton National Bank PLC (HNB) to ‘AA-(lka)’, from ‘A(lka)’
• Sampath Bank PLC to ‘AA-(lka)’, from ‘A(lka)’
• Seylan Bank PLC to ‘A+(lka)’, from ‘A-(lka)’
• DFCC Bank PLC to ‘A(lka)’, from ‘A-(lka)’
• National Development Bank PLC (NDB) to ‘A(lka)’, from ‘A-(lka)’
• Nations Trust Bank PLC (NTB) to ‘A(lka)’, from ‘A-(lka)’
• Pan Asia Banking Corporation PLC (PABC) to ‘BBB(lka)’, from ‘BBB-(lka)’

Fitch Ratings has also affirmed the national ratings of the following banks. 

• Amana Bank PLC – https://www.fitchratings.com/site/pr/10283247
• Union Bank of Colombo PLC (UB) – https://www.fitchratings.com/site/pr/10283288
• SANASA Development Bank PLC (SDB) – https://www.fitchratings.com/site/pr/10283289
• Housing Development Finance Corporation Bank of Sri Lanka (HDFC) – https://www.fitchratings.com/site/pr/10283246
• Cargills Bank PLC (CBL) – https://www.fitchratings.com/site/pr/10283245

For more details: https://shorturl.at/lDQLT (Newswire)

The post Fitch upgrades National Ratings of 10 Sri Lankan banks appeared first on Newswire.

Sri Lankan banks’ operating environment (OE) assessment and overall credit profiles will be supported by any improvement in the sovereign’s credit profile (Long-Term Foreign-Currency IDR: RD, Long-Term Local-Currency IDR: CCC-) following a completed debt restructuring, says Fitch Ratings. 

Issuing a statement, the Ratings Agency said this is due to the strong link between sovereign financial health and banks’ operating conditions. 

“We believe this would be positive for the National Ratings of Fitch-rated large Sri Lankan banks – albeit based on their creditworthiness relative to other Sri Lankan issuers,” it added.

Fitch Ratings further noted; “We expect an improvement in Sri Lanka’s credit profile to alleviate sovereign-related pressures on the banks, which is likely to be credit positive in terms of our financial and non-financial assessments.”

Sri Lankan banks’ current OE score of ‘ccc-’/stable is linked closely to the sovereign’s local-currency credit profile, given their predominant exposure to the domestic economy and government securities (local-currency treasury instruments: 33.4% of assets and foreign currency instruments: 3.4% at end-1H24) and lending to the broader public sector. The sovereign exposure tends to be higher among the large banks, and state-owned enterprise (SOE) exposure is primarily at the two state-owned D-SIBs. “We expect an improvement in Sri Lanka’s credit profile to alleviate sovereign-related pressures on the banks, which is likely to be credit positive in terms of our financial and non-financial assessments.”

As per Fitch’s National Scale Rating Criteria, the starting point to derive a national rating is an assessment of the issuer’s credit quality on the international rating scale, which may be reassessed following a sovereign rating change. In such instances, Fitch will update the national ratings of affected local issuers to reflect changes in relative rankings following the sovereign rating change. Fitch last recalibrated the agency’s Sri Lankan national rating scale on 12 January 2023 to reflect changes in the relative creditworthiness among Sri Lankan issuers following the downgrade of the sovereign’s Long-Term Local-Currency IDR to ‘CC’ from ‘CCC’. For more information see Fitch Downgrades 10 Sri Lankan Banks’ Ratings and Fitch Downgrades Bank of Ceylon’s Local Currency IDR to ‘CCC-‘; Maintains RWN.

The Ratings Agency said the ratings of locally incorporated banks, excluding Cargills Bank PLC (A(lka)/Negative) which is driven by our expectation of extraordinary shareholder support, are based on their standalone credit profiles. “We do not factor support into the ratings on the two state-owned D-SIBs, despite their strong state linkages, given the sovereign’s constrained ability to provide extraordinary support. However, a sustained improvement in the sovereign’s financial flexibility may lead to a reconsideration of state support,” it added.

Sri Lanka is close to completing its foreign-currency debt restructuring. A successful outcome, in line with the proposed framework for local bondholders, would be likely to significantly reduce the challenges faced by banks, improving their financial profiles. Pressures on foreign- and local-currency funding and liquidity have eased considerably due to better external sector flows and the bank’s efforts to preserve liquidity. 

Fitch Ratings states it expects banks to regain access to foreign-currency wholesale funding, following the restoration of the sovereign’s creditworthiness. (Newswire)

The post Sri Lanka bank assessment : new update from Fitch Ratings appeared first on Newswire.

Fitch Ratings has affirmed the Ceylon Electricity Board’s (CEB) National Long-Term Rating at ‘BB+(lka)’, stating that the outlook is stable.

The Ratings Agency also affirmed the National Long-Term Rating of CEB’s outstanding senior unsecured debentures at ‘BB+(lka)’.

According to Fitch Ratings, the CEB’s ratings are equalised with the Sri Lankan sovereign rating (Long-Term Local-Currency Issuer Default Rating CCC-) under Fitch’s Government-Related Entities (GRE) Rating Criteria. 

“This is based on our assessment that there is a very high likelihood that CEB, the country’s monopoly electricity transmitter and distributor, would continue to receive government support as the government would want to ensure an uninterrupted power supply. The government fully owns CEB, appoints the board and decides on investment strategy. Tariffs are set using a cost-reflective pricing method requiring regulatory approval. Previously, the utility set tariffs based on social objectives rather than commercial ones,” the Ratings Agency added.

Fitch further said it expects prices to fall by 20% in 2024 and 10% in 2025 and that the CEB’s financing costs will also fall amid lower interest rates, adding that the CEB has also reduced tariffs twice in 2024 by a cumulative 44.5%.

“CEB has operated on a cost-reflective tariff mechanism since June 2023, which is revised quarterly to ensure operating costs are covered. Our base case forecast assumes the tariff framework will remain in place, as any deviation is a key risk to CEB’s balance sheet. The quarterly tariff revision due in September 2024 has yet to be finalised, pending regulatory approval,” it said 

Stating that the new Electricity Act includes provisions to unbundle CEB’s generation, transmission and distribution into separate entities, Fitch said it believes that the unbundling will improve CEB’s efficiency and competitiveness.

“The utility is already preparing separate financials, maintains separate bank accounts and is in the process of allocating assets and liabilities for the three units. However, we believe the restructuring faces execution risk and may be contingent on the outcome of Sri Lanka’s general election on 14 November,” it pointed out. 

Full statement : https://www.fitchratings.com/research/corporate-finance/fitch-affirms-ceylon-electricity-board-at-bb-lka-outlook-stable-11-11-2024 (Newswire)

The post Fitch says CEB’s restructuring faces execution risk appeared first on Newswire.

The Sri Lankan authorities’ confirmation that they endorse the targets set under the country’s IMF programme and intend to implement debt restructuring based on the terms agreed with international sovereign bondholders in September, reduces risks to the debt treatment process associated with the outcome of the presidential election on 21 September, says Fitch Ratings.

In its latest update, the ratings agency said the election of Anura Kumara Dissanayake, of the opposition Janatha Vimukthi Peramuna (JVP), as president in September had increased policy uncertainty, raising the risk that the government could launch challenges to key elements of the IMF programme, potentially delaying Sri Lanka’s foreign-currency debt restructuring. 

However, the Ministry of Finance announced on 4 October that consultations with the IMF and Sri Lanka’s Official Credit Committee had been successfully concluded, suggesting that any policy changes are unlikely to threaten the IMF programme or the debt treatment agreement-in-principle reached under the previous administration.

The Ministry also indicated that the consultation had agreed that the preliminary agreement adhered to the principle of comparability of treatment between official creditors and bondholders, and was compatible with the IMF programme’s terms. We view this as a positive sign for the restructuring process’s prospects.

Fitch has rated Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ (Restricted Default) since May 2022, and the government is not currently servicing its foreign-currency debt. It may move the IDR out of ‘RD’ upon the sovereign’s completion of a commercial debt restructuring that it judges to have normalised the relationship with the international financial community. Sri Lanka’s post-default rating would depend upon our assessment of its credit profile. Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-‘ in September 2023, reflecting the completion of the local-currency portion of Sri Lanka’s domestic debt optimisation plan.

“We expect Sri Lanka’s government debt to remain relatively high, even if debt restructuring is completed successfully along the lines laid out in the agreements with its creditors. The IMF forecasts Sri Lanka’s gross general government debt/GDP ratio to decline only gradually to about 103% of GDP by 2028, from about 116% in 2022, after building in a local- and foreign-currency debt restructuring.

“The government’s revenue/GDP ratio remains low, but the effects of several revenue-raising measures passed since May 2022 are beginning to be felt. Revenue collection in 7M24 rose by about 43% yoy, well above the nominal GDP growth rate of 9.5% in 1H24. Our baseline projections assume an increase in revenue/GDP, from 11.4% in 2023 to 15.5% in 2026, reflecting the measures already in place. However, these forecasts could be affected, if the new government introduces fiscal reforms. The IMF programme’s targets offer some flexibility for changes in the government’s fiscal policy approach,” the rating agency said.

Fitch believes the president’s capacity to push through policy changes may depend partly on the outcome of the parliamentary election on 14 November. The JVP and its allies had relatively few seats in the outgoing legislature, though the trends evident in the recent presidential election suggest that there will probably be large changes in the makeup of the new chamber.

Fitch points out that the economy more broadly remains on a recovery trend. Real GDP growth was 5.0% yoy in 1H24, after contracting by 7.3% during 1H23. We expect the economy to expand by 3.9% in 2024 and to average growth of 3.6% over 2025-2026. External liquidity stresses have also eased, with foreign-exchange reserves hitting USD6.0 billion in August 2024, up almost 66% yoy. Nevertheless, the speed of the recovery in reserves is likely to be set back when Sri Lanka resumes external debt-service payments. (Newswire)

The post Fitch Ratings provides Positive Update on Sri Lanka’s debt restructuring progress appeared first on Newswire.

Lion Brewery (Ceylon) PLC (AAA(lka)/Stable), the leader in Sri Lanka’s beer market, could face more competition in the medium term following Distilleries Company of Sri Lanka PLC’s (DIST; AAA(lka)/Stable) decision to acquire beer producer Heineken Lanka Limited, Fitch Ratings said. 

Issuing a statement, the Ratings Agency said “Heineken is a distant second in Sri Lanka’s beer market for now, but we believe DIST has the industry know-how, market access and financial strength to elevate Heineken’s operations to a level that could weigh on Lion’s market share.

“We believe a large capacity expansion at Heineken Lanka would be required to compete effectively with Lion. We estimate the expansion will require significant capital outlay and at least two-to-three years to complete. We believe DIST has the financial strength to fund the expansion, with its annual free cash flow, excluding dividends, averaging LKR10 billion-12 billion. DIST, as the largest spirits manufacturer in the country, already has extensive market access covering all forms of retail channels, providing easy market penetration compared with a new entrant,” it said.

Fitch Ratings added “However, we expect DIST to face near-term challenges in terms of brand building given the complete ban on media advertising on alcoholic beverages by the government. Lion already has a very strong brand presence in the market compared with Heineken due to the greater mass-market appeal of its products, with cheaper pricing and customisation to local preferences.

“Lion’s ability to withstand competitive pressure is also supported by its strong rating headroom. Lion continued to maintain a net cash position as of 31 September 2023, compared with a negative rating sensitivity of EBITDA net leverage of above 5.0x. We believe this provides Lion with the flexibility to be more aggressive with its pricing strategy to defend its market share in an increasingly competitive environment.

“We expect the acquisition to be positive for DIST as it will help the company to strengthen its market position with a presence in both hard and soft liquor markets. The acquisition will also allow DIST to take advantage of the lower excise duties applicable to beer on an alcohol-equivalent basis. There has been a shift to beer from hard liquor in recent months due to the significant increase in excise duties. DIST could also benefit from the revival in Sri Lanka’s tourism industry, as beer is more popular among tourists than locally made hard liquor,” it said.

The Ratings Agency added “DIST has not disclosed the value of the transaction, but we do not believe it will have a material drag on the company or parent Melstacorp PLC’s (AAA(lka)/Stable) balance-sheet strength. We rate DIST at the consolidated profile of Melstacorp based on our Parent and Subsidiary Linkage Rating Criteria. Melstacorp’s last-12-month EBITDAR to net leverage stood at 0.7x at the end of September 2023, compared with a negative rating sensitivity of above 5.5x, indicating strong rating headroom. Furthermore, our rating-case assumptions include annual spending of LKR5.0 billion on potential M&A.” (NewsWire)

The post Distilleries’ acquisition of Heineken Lanka may challenge Lion Brewery share – Fitch Ratings appeared first on Newswire.

The targets laid out in Sri Lanka’s budget for 2024 will be challenging to meet, even with the economic recovery that we expect to continue next year, says Fitch Ratings. 

Issuing a statement, the Ratings Agency said the fiscal deficit is set to be wider than its current forecast of 7.1% of GDP in 2024 in light of the new data, even after excluding bank recapitalisation costs, and the revenue/GDP ratio will be lower than we had assumed.

“The government is targeting a budget deficit of 9.1% of GDP in 2024, wider than a revised estimate of 8.5% in 2023. However, without bank recapitalisation costs, the deficit in 2024 would be a narrower 7.6% of GDP. Excluding recapitalisation costs, the budget targets a primary surplus of 0.8% of GDP in 2024, against a deficit of 0.7% in 2023. However, including recapitalisation costs pushes the 2024 primary deficit target to 0.6% of GDP.

“The primary surplus goal for 2024, excluding bank recapitalisation, is broadly in line with the 0.8% of GDP projected by the IMF in March when it approved Sri Lanka’s USD3 billion Extended Fund Facility (EFF). We also see the revenue target as relatively aligned. However, the government’s expenditure target for 2024, at 22.2% of GDP, is somewhat higher than the 19.7% the IMF had envisioned and well above the revised budget estimate of 18.7% for 2023,” the Ratings Agency said.

Fitch Ratings further said the release of the next tranche of EFF financing, worth around USD330 million, will depend partly on the IMF’s assessment of Sri Lanka’s progress in securing financing assurances from official creditors. 

The Ratings Agency added that it believes there has been some progress since March, but the timeline for a restructuring deal with official creditors remains unclear.

Fitch Ratings also said that it believes there are significant risks to the government’s revenue goal for 2024. Sri Lanka has a record of fiscal slippage, and revenue collection fell 29% short of the target of over 9M23. The authorities aim to raise revenue by almost 45% in 2024. This will be aided by a planned 3pp increase in the value-added tax to 18%, but the boost to revenue from inflation is set to weaken in 2024. We project consumer prices will rise by 8.7% on average in 2024, compared with 22.1% in 2023. The lift from economic growth, which Fitch projects at 3.3% in 2024, will also be modest.

“Downside risks to revenue could be offset by lower-than-budgeted spending. We think the presidential election in late 2024 will incentivise the government to keep to its spending plans, which include a 14% increase in spending on salaries and wages. Nevertheless, if revenue falls short, there may be some room to trim capital expenditure, which amounts to almost 20% of total planned spending and is budgeted to rise 55% in 2024, excluding bank recapitalisation.

The government’s efforts to implement governance reform after a recent diagnostic study by the IMF may also support revenue collection. The budget proposes to establish a new revenue authority under the Ministry of Finance to improve tax collection, and a new investment law will look to establish a National Economic Commission to promote investment. However, it will take time to assess these bodies’ effectiveness,” the Ratings Agency added.

Fitch rates Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘RD’ (Restricted Default), stating “ 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 rating would depend upon our assessment of its credit profile.

Fitch upgraded Sri Lanka’s Long-Term Local-Currency IDR to ‘CCC-‘ in September, reflecting the completion of the local-currency portion of Sri Lanka’s domestic debt optimisation plan.

Full report : https://shorturl.at/yLWY1 (NewsWire)

The post Targets of 2024 budget challenging to meet – Fitch Ratings appeared first on Newswire.

Fitch Ratings says it does not believe cash flow from operations will be sufficient to cover the Ceylon Electricity Board’s (CEB) interest obligations in 2023, despite a 150% tariff increase. 

Issuing a statement, the Ratings Agency pointed out that this was due to the reduced contribution from low-cost hydropower generation during the year, which compelled CEB to purchase emergency power at higher costs to meet the shortfall. 

“At the same time, energy demand has risen with the gradual recovery of economic activity. CEB has requested an off-cycle tariff hike to cover its increased costs, but it is yet to be approved,” Fitch said.

Fitch Ratings has also upgraded the CEB’s National Long-Term Rating and the rating on CEB’s senior unsecured debentures to ‘BB+(lka)’, from ‘B(lka)’, adding that the Outlook is Stable.

The upgrade follows the 28 September 2023 upgrade of the Sri Lankan sovereign’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘CCC-‘, from ‘Restricted Default (RD)’. 

The Ratings Agency stated that the CEB’s ratings are equalised with that of its parent, the Sri Lankan sovereign, based on its assessment of a ‘Very Strong’ likelihood of state support under our Government-Related Entities (GRE) Rating Criteria.

CEB is Sri Lanka’s monopoly electricity transmitter and distributor and accounts for around 75% of the country’s power generation.

Full Fitch Ratings report : 

https://www.fitchratings.com/research/corporate-finance/fitch-upgrades-ceylon-electricity-board-to-bb-lka-outlook-stable-10-10-2023 (NewsWire)

The post CEB cash flow situation : Fitch shares opinion appeared first on Newswire.

Fitch Ratings has affirmed its ratings on fifteen (15) Sri Lankan banks, while 14 of them have been removed from ‘Rating Watch Negative’ (RWN) and assigned stable outlooks.  

The Ratings Agency affirmed Bank of Ceylon’s (BOC) Long-Term Local-Currency Issue Default Rating (IDR) at ‘CCC-‘ and removed it from RWN while adding that the Outlook is Stable.

At the same time, Fitch has also affirmed the National Long-Term Ratings of the following banks, removed them from RWN and assigned Stable Outlooks.

– BOC at ‘A(lka)’

– People’s Bank (Sri Lanka) at ‘A(lka)’

– Commercial Bank of Ceylon PLC at ‘A(lka)’

– Hatton National Bank PLC at ‘A(lka)’

– Sampath Bank PLC at ‘A(lka)’

– National Development Bank PLC at ‘A-(lka)’

– Seylan Bank PLC at ‘A-(lka)’

– DFCC Bank PLC at ‘A-(lka)’

– Nations Trust Bank PLC at ‘A-(lka)’

– Pan Asia Banking Corporation PLC at ‘BBB-(lka)’

– Union Bank of Colombo PLC at ‘BBB-(lka)’

– Amana Bank PLC at ‘BB+(lka)’

– Sanasa Development Bank PLC at ‘BB+(lka)’

– Housing Development Finance Corporation Bank of Sri Lanka at ‘BB+(lka)’

Fitch further affirmed Cargills Bank Limited’s (CBL) National Long-Term Rating at ‘A(lka)’ and removed it from RWN, adding that it has assigned a Negative Rating Outlook.

The RWN on these banks’ senior and subordinated debt ratings, where assigned, has also been removed.

BOC’s Long-Term Foreign-Currency IDR of ‘CC’, Short-Term IDR of ‘C’, Viability Rating of ‘cc’ and Government Support Rating of ‘ns’ were not considered in this review.

Full report : https://shorturl.at/huCLZ (NewsWire)

The post Fitch affirms ratings on 15 Sri Lankan Banks appeared first on Newswire.

Fitch Ratings has downgraded Sri Lanka’s Long-Term Local-Currency (LTLFC) Issuer Default Rating (IDR) to ‘RD’ (Restricted Default) from ‘C’. 

The Ratings Agency said the ratings on its local-currency bonds tendered in the domestic debt exchange have been downgraded to ‘D’ from ‘C’.

Sri Lanka’s other four local-currency bonds not tendered in the domestic debt exchange have been affirmed at ‘C’.

The Long-Term Foreign-Currency (LTFC) IDR has been affirmed at ‘RD’, and the ratings on Sri Lanka’s foreign-currency bonds have been affirmed at ‘D’.

All issue ratings have subsequently been withdrawn. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.

Fitch has withdrawn the issue ratings of Sri Lanka’s foreign and local-currency bonds as these are no longer considered to be relevant to the agency’s coverage.

A full list of rating actions is detailed below;

KEY RATING DRIVERS

Distressed Debt Exchange: The downgrade of Sri Lanka’s LTLC IDR reflects the partial completion of an exchange of Sri Lanka’s T-bonds on 14 September as part of a broader domestic debt optimisation (DDO) launched in July 2023. The DDO also includes conversion of T-bills held by the Central Bank of Sri Lanka (CBSL) into treasury bonds (T-bonds), which has not yet been completed.

In Fitch’s view, the exchange of T-bonds constitutes a distressed debt exchange (DDE) under the agency’s criteria, given that the maturity extension of the tendered bonds represents a material reduction in terms versus the original contractual terms, and given that the exchange is needed to avoid a traditional payment default.

Reduction in Terms: Eligible bonds for which tenders were received and accepted have been exchanged into 12 new instruments of equal size and the same aggregate principal amount, maturing between 2027 and 2038. Accepted tenders reached about 37% of the outstanding principal amount of eligible bonds outstanding as of 28 June 2023. Accepted tenders were predominantly by superannuation funds, which will face higher tax rates on income from T-bonds if they did not meet a participation threshold.

Local-Currency Debt Service Continuing: Fitch believes that Sri Lanka has continued to service the T-bonds throughout the DDO process, and that T-bonds not tendered in the exchange will continue to be serviced as per their original terms, including but not limited to the entirety of the 12 series of T-bonds (out of 61 eligible series) for which no valid tenders were received. Four of these 12 series were rated by Fitch and were affirmed at ‘C’ prior to withdrawal.

Local-Currency Restructuring Incomplete: Under Fitch’s rating criteria, the LTLC IDR will remain in ‘RD’ until the debt exchange is completed in its entirety. Fitch deems the process incomplete, as the exchange of T-bills held by CBSL is still pending. Fitch regards the T-bills as public debt securities, and they are also held by private investors.

Foreign-Currency IDR in Default: The sovereign remains in default on foreign-currency obligations and has initiated a debt restructuring with official and private external creditors. The Ministry of Finance had issued a statement on 12 April 2022 that it had suspended normal debt servicing of several categories of external debt, including bonds issued in international capital markets, foreign currency-denominated loans and credit facilities with commercial banks and institutional lenders.

ESG – Governance: Sri Lanka has an ESG Relevance Score of ‘5’ for Political Stability and Rights as well as for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Sri Lanka has a medium WBGI ranking in the 45th percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

ESG – Creditor Rights: Sri Lanka has an ESG Relevance Score of ‘5’ for Creditor Rights, as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The affirmation of Sri Lanka’s LTFC IDR at ‘RD’ and downgrade of LTLC IDR to ‘RD’ reflect a default event. (NewsWire)

The post Fitch downgrades Sri Lanka’s Long-Term Local-Currency IDR to ‘RD’ appeared first on Newswire.

Fitch Ratings has rated Sri Lanka’s Long-Term Foreign-Currency Issuer Default Rating at ‘Restricted Default’, or RD. 

The Ratings Agency stated that the country’s reserve levels will influence the rating only once it has been moved out of ‘RD’. 

Despite an increase in reserves over the last nine months to around USD3.8 billion in July 2023, they remain well below the USD7.3 billion average over 2014-2019, it added.

Fitch Ratings made the observation in a statement issued on the reserve dynamics among APAC sovereigns. 

Reserve dynamics among APAC sovereigns appear to be diverging, with potential implications for their credit profiles, it said.

Stating that some central banks have been able to accumulate reserves on current account improvements or investment inflows, Fitch Ratings states that others still see their currencies under pressure from US Fed tightening prospects.

Full statement : https://www.fitchratings.com/research/sovereigns/reserve-trends-diverge-among-apac-sovereigns-07-09-2023 (NewsWire)

The post Fitch rates SL’s Long-Term Foreign-Currency Issuer Default at ‘Restricted Default’ appeared first on Newswire.

The Sri Lankan government’s debt restructuring plan is likely to reduce investment and liquidity risks for domestic insurers, Fitch Ratings said.

According to the Ratings Agency, it expects pressure on insurers’ investment and capital profiles to ease as the proposed plan will not have a direct impact on the local-currency government debt holdings of insurers, banks and non-banking financial institutions. 

“Nonetheless, the proposal is only one aspect of the sovereign’s (Long-Term Local-Currency Issuer Default Rating: C) debt sustainability plan. Ratings on Sri Lankan insurers remain on Rating Watch Negative (RWN) amid high investment and liquidity risks, pressure on regulatory capital positions and a weak financial performance outlook, which could undermine insurers’ credit profiles relative to other entities on the national ratings scale.

Insurers’ holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected by the debt restructuring proposal, as we expected. However, restructuring of the sovereign’s foreign debt, including international sovereign bonds (ISB), has yet to be finalised. Among Fitch-rated insurers, only a few have exposure to SLDBs or ISBs, which accounted for less than 5% and 0.2%, respectively, of the total invested assets of Fitch-rated insurers at end-March 2023,” it said.

Fitch Ratings further stated that the government has presented three treatment options for SLDBs, with the impact of any present-value losses on capital dependent on the treatment each insurer chooses. 

“However, we believe that the satisfactory capital buffers maintained by Fitch-rated insurers would help to cushion any negative impact from the losses.

The investment and liquidity risk profiles of Sri Lankan insurers are closely linked with the sovereign, banks and non-bank financial institutions (NBFI) as their investment portfolios are dominated by fixed-income securities issued or guaranteed by the government (47% of invested assets at end-March 2023), corporate debt (21%) and deposits with local banks and NBFIs (10%),” it added.

The Ratings Agency noted that the government’s domestic debt restructuring proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will ease pressure on banks’ already stressed credit profiles. Fitch continues to maintain all ratings on domestic banks and NBFIs on RWN due to the heightened near-term downside risks to their credit profiles from capital, funding and operating environment risks.

“We expect the sparse foreign-currency liquidity in the local banking system to continue to limit insurers’ ability to meet foreign-currency obligations, such as reinsurance payments and claim obligations arising from the small portion of foreign currency-denominated policies. Fitch-rated insurers’ foreign-currency insurance contract obligations are mostly reinsured. Fitch-rated insurers also have foreign-currency deposits with local banks to support their foreign-currency obligations,” it added. (NewsWire)

The post Debt restructuring likey to reduce risks for domestic insurers – Fitch appeared first on Newswire.

The Sri Lankan government’s proposal for treatment of domestic debt marks a significant step towards resolving uncertainties around the impact of the sovereign’s debt restructuring on the local banking sector, but complications may arise from a number of factors, Fitch Ratings stated.

The Ratings Agency said in a statement that the proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will alleviate some of the pressure on their already stressed capital positions from weakening loan quality and the rupee’s depreciation. Fitch’s base case did not expect treasury bills held by banks to be subject to restructuring, but assumed banks’ treasury-bond holdings would be. 

“Bank holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected, as we had anticipated, and we still expect an impact on international sovereign bonds (ISBs) as well. However, these together account for only about 5.5% of banks’ combined assets, a much smaller share than treasury securities (26.4% for Fitch-rated domestic banks). The proposal also includes a restructuring of foreign-currency bank loans to the government (less than 1% of combined assets for Fitch-rated banks), though without detailed plans,” the statement said.

Fitch Ratings further stated that the government has outlined three treatment options for SLDBs, adding, “We expect banks will generally opt for the choice involving conversion of such debt into local currency-denominated instruments; banks have so far opted to convert maturing SLDBs to rupee-denominated treasury bonds since the announcement of suspension of foreign debt servicing in April 2022.”

Provisioning should help to moderate the hit to bank capital from the debt treatment. Fitch-rated Sri Lankan banks have already made provisions of 35% or higher for ISBs, with SLDBs being subject to lower provisioning due to the possibility of obtaining rupee-denominated treasuries.

Nonetheless, worsening impaired loans (end-May 2023: 13.3% of system loans, from 1Q22: 8.4%) in line with the economic stress associated with the sovereign default and the unwinding of forbearance provided during the Covid-19 pandemic are already exerting pressure on banks’ thin capital buffers, it said.

“We do not believe a restructuring of the sovereign’s local-currency obligations is likely to trigger a loss of depositor confidence in the banking system, based on the proposed plans. However, funding stress remains a negative sensitivity for bank ratings. Fitch-rated Sri Lankan banks’ national ratings remain on Rating Watch Negative (RWN) to reflect the potential for the banks’ creditworthiness relative to other entities on the Sri Lankan national ratings scale to deteriorate. This reflects heightened near-term downside risks to credit profiles from capital and funding stress.

A downgrade of the sovereign’s ‘CC’ Long-Term Local-Currency Issuer Default Rating would not automatically drive a downgrade in Sri Lankan bank ratings. To resolve the RWN on these ratings, we will need to assess the impact to the banks’ capital once debt treatment terms are finalised, including the effects of any present value reductions from an exchange of bonds and those of any regulatory or accounting forbearance. We may resolve and affirm the banks’ ratings if we think risks from funding and capital stresses have abated, at both the individual bank and the sector level, to the extent that we believe the banks’ ability to service obligations in local and foreign currency is not hindered and/or banks are able to continue as a going concern and avoid failure.

Although the government’s domestic debt treatment announcements go some way towards resolving uncertainties over Sri Lankan bank ratings, many risks remain. It is still unclear, for example, whether the government’s proposals have received support from the sovereign’s key external creditors. If not, the risk of further domestic debt restructuring could linger, resulting in further instability for the banking sector,” the Ratings Agency added. (NewsWire)

The post Sri Lanka Domestic Debt plan : Fitch reveals position appeared first on Newswire.

Fitch Ratings on Tuesday affirmed India’s sovereign rating with a stable outlook saying the country has a robust growth outlook and resilient external finances. “Fitch Ratings has affirmed India’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook,” it said in a statement, adding strong growth potential is a key supporting factor for the sovereign rating.

“India’s rating reflects strengths from a robust growth outlook compared with peers and resilient external finances, which have supported India in navigating the large external shocks over the past year,” Fitch Ratings said.

However, these are offset by India’s weak public finances, illustrated by high deficits and debt relative to peers, as well as lagging structural indicators, including World Bank governance indicators and GDP per capita, it added.

The agency has kept India’s credit rating unchanged at ‘BBB-‘ — the lowest investment grade rating — since August 2006.

Fitch Ratings forecast India to be one of the fastest-growing rated sovereigns globally at 6 per cent in the current fiscal year ending March 2024 supported by resilient investment prospects.

“Still, headwinds from elevated inflation, high interest rates and subdued global demand, along with fading pandemic-induced pent-up demand, will slow growth from our FY23 estimate of 7 per cent before rebounding to 6.7 per cent by FY25,” the global rating agency said. (PTI)

The post Fitch affirms India’s sovereign rating on robust growth outlook appeared first on Newswire.