KUALA LUMPUR – Sri Lanka defaulted on its debts for the first time in history as its government seeks to halt an economic collapse that has sparked widespread demonstrations and a political crisis.
According to Bloomberg, its central bank governor Nandalal Weerasinghe said that the country’s policy makers had informed creditors that the nation would be unable to make payments until the debt is restructured. This makes the default pre-emptive. The coupon payments totaling US$78 million on notes maturing in 2023 and 2028, had a 30-day grace period that ended on May 18.
The country has been beset by escalating inflation, which Weerasinghe predicts could reach 40% in the coming months, is combined with a depreciating currency and an economic crisis that has deprived Sri Lanka of the hard currency it needs to import food and fuel.
Public ire has bubbled over into violent demonstrations which prompted the government to announce in April that it would suspend payments on its US$12.6 billion foreign debt to conserve the funds for basic essential goods.
This is the first time Sri Lanka had defaulted on its sovereign debt since gaining independence in 1948. Its bonds have been among the poor performers in the world in 2022 and their trade is deep in distress with holders preparing for losses up to 60 cents per dollar.
Many of Sri Lanka’s bonds contain so-called cross-default clauses, which causes all outstanding dollar debt to default if a single bond defaults. In regards to the debt due in 2023 and 2028, there is a clause which would trigger if any payments over US$25 million were not met. S&P Global Ratings had already declared a selective default call on the country in late April.
Since the initial bankruptcy announcement, the country sought for bailouts from the International Monetary Fund (IMF) and also needs to negotiate a debt restructuring with creditors. Sri Lanka had previously stated that it would require between US$3 billion to US$4 billion in order to emerge from its current crisis.
Guido Chamorro, the co-head of emerging-market hard-currency debt at Pictet Asset Management, which holds Sri Lankan Bonds, stated that “It’s not surprising. It was well flagged and mostly priced with most bonds priced in the high 30s.”
A multitude of causes — Federal Reserve interest rate hikes, skyrocketing commodity prices, and the war in Ukraine — have contributed to tighter global lending, which has had a disastrous impact on the low-income country – the largest sovereign issuer of junk dollar bonds in Asia. This is after the pandemic cut tourism revenue by more than 75%.
Weerasinghe stated recently that he would like to see a finance minister appointed to approve and aid agreements. The nomination of a new prime minister had seen Sri Lanka’s political situation improve and Weerasinghe stated that this gave him confidence to keep his position. Prior to that, he vowed to resign if political stability was not restored.
With a new prime minister, cabinet, and parliament in session, Sri Lanka is in a better position and appears to be moving in the right path, according to Weerasinghe. He added that this may be the finest time to invest in Sri Lanka since we offer an attractive rate of return.
JPMorgan Chase & Co turned overweight on Sri Lanka’s dollar bonds on May 18, citing recent political stability indicators that could pave the path for IMF and debt restructuring discussions.
However, reorganisation could take approximately six months and it is difficult to forecast the timeline given the current situation, Weerasinghe added.
Despite that, he said that recommendations for legal advisors for the reorganisation are to happen before cabinet soon.
Sri Lanka’s bonds were mixed on May 19, but it was higher than their record lows in the previous week. This suggests that traders anticipate better recovery values.
According to data compiled by Blooomberg, dollar bonds due in 2030 were marked 0.28 cents lower at 38.39 cents on the dollar while notes maturing in July were 0.22 cents higher at 42.78 cents.
The Colombo All-Share Index declined by more than 3% in response to a worldwide equity selloff.
Chamorro stated, “Defaults are not the end; they might indicate a fresh beginning. Now the difficult work begins.”
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