By Paneetha Ameresekere
Ceylon Finance Today: The Government of Sri Lanka (GoSL) may be exposing its vulnerability to external shocks in the backdrop of the rapid rise of its external debt profile, market sources told Ceylon FT.
Ceylon Finance Today: The Government of Sri Lanka (GoSL) may be exposing its vulnerability to external shocks in the backdrop of the rapid rise of its external debt profile, market sources told Ceylon FT.
As per the latest data released by Central Bank of Sri Lanka (CBSL) on Friday (26 December), it showed that external debt in the nine month period from last year end to end September of this year increased by Rs 222.5 billion (7.5%) to Rs 3182.9 billion, constituting 43.2% of GoSL's total debt profile.
Further, Sri Lanka's external debt servicing commitments, which in the 12 months ended November of this year (2014) was estimated to have had been US$ 5.7 billion according to CBSL, are however expected to increase by US$ 1.2 billion (21.1%) to US$ 6.9 billion by October of next year, causing pressure on both the exchange rate (ER) as well as on CBSL's external reserves.
Further, Sri Lanka's external debt servicing commitments, which in the 12 months ended November of this year (2014) was estimated to have had been US$ 5.7 billion according to CBSL, are however expected to increase by US$ 1.2 billion (21.1%) to US$ 6.9 billion by October of next year, causing pressure on both the exchange rate (ER) as well as on CBSL's external reserves.
These developments have to be looked at in the backdrop of two key issues that are expected to take place next year, an economist said.
Those are the possibility of sanctions being placed on the island in Geneva in March over human rights (HR) issues. This may affect export and tourism earnings as Sri Lanka's key markets for such is the West which is gunning for the island on those matters. And the other, the expected rise in international interest rates by summer, in tandem with a decision that the Federal Reserve System is expected to take, i.e. of raising its key policy rate, the reverse repo, because of the recovery of the US economy, which is making demand once more robust in the world's largest economy. That however would be to the detriment of Sri Lanka, which seeks to meet its external commitments by increased foreign borrowings because it runs a trade deficit, which in the first 10 months of the year (2014) grew by 4.3% year on year to US$ 6.79 billion.
This is also in the context that Sri Lanka is expected to raise another US$ 1.5 billion (Rs 198.5 billion) by the sale of a Sovereign Bond in international markets next month. The figure Rs 198.5 billion is arrived at, on the basis that the exchange rate (ER) had deteriorated to Rs 132.35 to the US dollar in 'spot next next' trading as at Monday (29 December), a deterioration of 36 cents in a day, thereby causing pressure on interest rates as well, in the backdrop of the market's and GoSL's growing appetite for US dollars.
These foreign debt figures however may be deflated numbers, because they don't take into account proxy international borrowings made by the state through certain financial institutions. For instance last year (2013) GoSL raised $ 1.35 billion this way. Envisaged repayment commitments may however be accurate.
Those are the possibility of sanctions being placed on the island in Geneva in March over human rights (HR) issues. This may affect export and tourism earnings as Sri Lanka's key markets for such is the West which is gunning for the island on those matters. And the other, the expected rise in international interest rates by summer, in tandem with a decision that the Federal Reserve System is expected to take, i.e. of raising its key policy rate, the reverse repo, because of the recovery of the US economy, which is making demand once more robust in the world's largest economy. That however would be to the detriment of Sri Lanka, which seeks to meet its external commitments by increased foreign borrowings because it runs a trade deficit, which in the first 10 months of the year (2014) grew by 4.3% year on year to US$ 6.79 billion.
This is also in the context that Sri Lanka is expected to raise another US$ 1.5 billion (Rs 198.5 billion) by the sale of a Sovereign Bond in international markets next month. The figure Rs 198.5 billion is arrived at, on the basis that the exchange rate (ER) had deteriorated to Rs 132.35 to the US dollar in 'spot next next' trading as at Monday (29 December), a deterioration of 36 cents in a day, thereby causing pressure on interest rates as well, in the backdrop of the market's and GoSL's growing appetite for US dollars.
These foreign debt figures however may be deflated numbers, because they don't take into account proxy international borrowings made by the state through certain financial institutions. For instance last year (2013) GoSL raised $ 1.35 billion this way. Envisaged repayment commitments may however be accurate.
Meanwhile, those proxy borrowings comprised $ 500 million raised by Bank of Ceylon at a 5.3% interest rate in April, $ 750 million by NSB at a higher 8.875% interest rate in September and $ 100 million by DFCC Bank at an even higher 9.6% interest rate in October. All these three issues were of a five year tenure, each.
According to CBSL, the annual average value of the ER was Rs 129.11 last year. On that basis, $ 1.35 billion is equivalent to Rs 174.3 billion worth of proxy borrowings by GoSL last year.
According to CBSL, the annual average value of the ER was Rs 129.11 last year. On that basis, $ 1.35 billion is equivalent to Rs 174.3 billion worth of proxy borrowings by GoSL last year.
Additionally, GoSL directly raised five year money of $ one billion in value at a 6% interest rate in January 2014. Three months later in April, it raised a further $ 500 million of a similar tenure at a lower, 5.125% interest rate.
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