Macro Analysis /
Sri Lanka

Sri Lanka: Govt seeks IMF assistance; focus on economic revival emerges

  • Quantifying the impact of key macro variables amid COVID-19

  • Sri Lanka requests for IMF relief; inflows narrowly stack up against repayments

  • SL B2 Sovereign rating under review by Moody’s; Fitch downgrades to B- Negative

Sri Lanka: Govt seeks IMF assistance; focus on economic revival emerges
Asia Securities
30 April 2020
Published byAsia Securities

As lockdowns continued island-wide, the government and Central Bank stepped up efforts to mitigate the economic impact. This included further restrictions on imports while the government sought the IMF’s assistance to help the funding shortfall. Amid this backdrop, Moody’s placed Sri Lanka's Sovereign rating (B2) under review while Fitch downgraded the Sovereign rating to B- Negative. The spot rate recorded a 1.0% MoM depreciation in April, averaging at ~USD/LKR 193.09 for the month (currently at USD/LKR 192.76). Amid low expected inflows, we forecast a 12.0% - 16.0% YoY depreciation of the USD/LKR on our base case, while the fiscal deficit looks to expand to ~8.9% - 10.7% of GDP in 2020 (assuming the spread of COVID-19 is contained by end May). Meanwhile, April saw continued outflows from the govt bond market, with foreign bond holdings currently at less than USD 130mn. The sovereign yield curve continues to factor in a higher risk premium, especially in the short end of the curve. Amid the current backdrop, we forecast GDP growth to contract by 4.0% - 4.5% YoY in 2020.

Quantifying the impact of key macro variables amidst COVID-19

Following on from our GDP analysis, we focus on a scenario-based analysis for the impact of COVID-19 on other key macro variables. Our base case analysis indicates that the key impact areas are; 1) high fiscal deficit of 7.9% - 10.7% of GDP, with low government revenue, despite curbing expenditure, 2) weakening USD/LKR rate of 205.00 – 212.00 owing to large outflows, soft inflows and a strengthening USD, 3) the current deficit reaching 4.0% - 4.5% of GDP as a result of significantly low tourism revenue and remittances and 4) higher debt/GDP of 87.0% - 95.0% a on higher funding requirement.

Sri Lanka requests for IMF relief; inflows narrowly stack up against repayments

The GoSL has requested for immediate funding under the Rapid Credit Facility (RCF) program, which is currently under review by the IMF. The govt expects ~USD 800mn in assistance as a result. Support under the RCF program is provided as an outright disbursement, without a program-based conditionality or reviews. Financing under the RCF carries a zero-interest rate, with a grace period of ~5.5 years, and a final maturity of 10 years. We expect the govt to re-schedule repayments of bilateral and multilateral obligations, while we do not expect a default in the upcoming Sovereign bond repayment in October. We note that the government has ~USD 5.0bn funding in place, which narrowly stacks up against its USD 4.5bn repayments due this year.

SL B2 Sovereign rating under review by Moody’s; Fitch downgrades to B- Negative

The Moody’s review period came amidst 1) tightening global financial conditions as a result of COVID-19, 2) a fall in export revenue and 3) a sharp slowdown in GDP growth. According to Moody’s, the current backdrop looks to exacerbate Sri Lanka’s existing liquidity position and external vulnerability risk resulting in higher financing stress and economic instability. Meanwhile Fitch ratings revised the Sovereign rating downwards to B- with a Negative outlook. In-line with our view, Fitch expects the fiscal deficit at 9.3% (ASEC Estimate – 8.9% - 10.7%). Debt/GDP is forecasted at 94.0% in 2020 (ASEC Estimate - 87.0% - 95.0%), higher than the ‘B’ median of 52.0%. Fitch forecasts GDP growth to contract by 1.0% in 2020, above our estimate of 4.0% - 4.5% YoY.