In the hours since we published our note outlining bad news (big jump in money printing in September) and good news (better domestic financing conditions pointing to less money printing moving forward) for Sri Lanka's eurobonds, another catastrophically bad reserve print this morning warrants an addendum to our note.
After having jumped from US$2.8bn in July to US$3.54bn in August on the back of the US$787mn SDR allocation, reserves reversed the increase and fell to US$2.7bn in September, and have now plummeted even further to US$2.27bn in October. This is equivalent to just c6 weeks of trailing goods imports and covers less than a third of Sri Lanka's gross external financing needs over the next year (with a projected US$2.43bn current account deficit in 2022, according to the IMF, and US$5.34bn of public and private external amortisations due over the next 12 months, including a US$500mn eurobond in January and US$1bn eurobond in July). Reserves are now down by US$5.67bn from pre-Covid levels, and would be even lower once reported swaps of US$581mn are factored out.
It is rare, but not unprecedented, for a country of Sri Lanka's size to reach this level of reserves without defaulting (by comparison, looking at some other previous defaults, Seychelles had less than a week of reserves in 2008; Barbados seven weeks in 2018; Suriname 0.6 months in 2020; Zambia 2.3 months in 2020). As we discussed in this morning’s note, the Sri Lankan government still seems intent on bridging the gap with ad hoc bilateral swaps and loans, but this doesn’t change the fact that reserves are on a one-way course to zero without an urgent policy correction. And, as we outlined in our note, much of this financing is unlikely to materialise in full (notably none of the facilities have been confirmed from the creditor side).
Of course, no country ever runs reserves to zero before deciding to default, even one like Sri Lanka with a dogged determination to preserve its untarnished debt servicing record. The question then becomes what level reserves need to reach before Sri Lanka reaches out to the IMF, and at what level default becomes the only obvious path out regardless of its IMF and policy plans.
Sri Lanka: Good and bad news for bonds, 5 November 2021
Plummeting reserves push Sri Lanka closer to default, October 2021
Sri Lanka: Imbalances to remain despite policy shift, September 2021
Sri Lanka’s food and currency “emergency”, September 2021 (Malik)
Debt reclassification causes confusion, May 2021
Time to take profits as upside is priced in, April 2021
Chinese swap provides breathing room, March 2021
External pressure increases risk of debt default, February 2021
Sri Lankan budget aims for ambitious consolidation, November 2020
Back to Buy as the pessimism is excessive, November 2020