Page 56 - Management Digest Udyama Vol 1 Isuue 2

With the IMF Rapid Funding surge in their market yields. The Jan 2022 saw its yields spiking to
Facility and Bangladeshi SWAP 45%, while Jul 2022 maturity saw its yields spiking to 40%.
inflows, reserves are estimated to
rise to around USD 3.5Bn which Fund flows towards SL might be remote:
is still well below par. As at now,
the foreign currency reserves are Inflows to Sri Lanka has been weak amidst the struggling
far short of the foreign currency macroeconomic environment. Rating downgrades are further
debt obligations which is the dampening interest as illustrated by the selling pressure on ISBs.
biggest risk to the system at the Central Banks around the world make HAWKISH turn reverting funds
moment and the primary cause to developed markets. Rate hikes by a number of Central Banks and
of the weak currency. 1Q2022 possible tapering in the US are expected to shift the fund flow towards
and 3Q2022 are likely to be the developed markets while raising capital or debt is going to be
the biggest concerns in relation challenging for countries like Sri Lanka.
to repayment of debt. We are
likely to experience a high level
of stress and pressure during
the 2 abovementioned periods.
However, the problems do not
stop there as 4Q2022 also has a
high level of debt obligations, but
the bulk of it is Rupee Debt.

External Outlook weakens
further: High Risk
(Downgraded)

More downgrades from Rating
Agencies: POTENTIAL IMF PROGRAM

With the heavy debt burden and As predicted IMF program is
lower foreign reserves, two out now more likely than not:
of the three rating agencies have
indicated potential downgrades. In line with the forecast of our Fixed Income Health score in Jan 2021,
Moody’s Rating for Sri Lanka First Capital Research expected that Sri Lanka might negotiate an IMF
currently stands at Caa1. The program within 3Q2021. Though there are rumours of negotiations,
outlook was recently changed so far such a program has not materialized, but the Govt has obtained
to “Under Review”. Similarly, the Rapid Funding Facility of USD 787Mn from the IMF. Considering
S&P Global has a rating of CCC+ current situation of the economy, the economic indicators seem to
for Sri Lanka and the agency be slightly worse than our initial estimates (Eg: Jun-2021 Foreign
recently downgraded the Outlook Reserves dipped to USD 4.0Bn 6 months earlier than our expectations).
to Negative. Fitch, however, has Analysing the economic indicators and the forecast, we believe there
affirmed the rating for Sri Lanka seems to be an 85% probability that Sri Lanka may consider moving
at CCC. Fitch does not provide into an IMF program as soon as possible.
“Outlook” for countries with
ratings of CCC and below.
RECOMMENDATIONS
ISB yields surge:
Bond Market: Steep upward pressure on Yield Curve, Yields to
Two of the rating agencies rise by a further 150-200bps
changing their outlook on Sri
Lanka has had a negative impact Pressure on yields in the Government Securities market is expected to
on the sovereign bond market rise due to the following reasons:
as well. The short-term yields,
especially the 3Yr and low
maturities has witnessed a major

54 September 2021