- SL has estimated US $ 13.8bn external debt set to mature during 2019-2022
- Out of that, about US $ 5 billion account for int’l sovereign bond settlements
- Central banks in major economies are seen raising interest rates
- Says faster than expected rise in commodity prices could upset SL’s BoP position
Sri Lanka’s possible plans to roll over its Eurobonds that are maturing every year from 2019 onwards could face considerable challenges as tighter than expected global financial conditions would likely increase the cost of debt, the World Bank said yesterday.
The situation could get even tougher for Sri Lanka as the Washington-based lender is observing a faster than expected rise in commodity prices, which could increase pressure on the island nation’s fragile balance of payments (BoP) position and make domestic fuel and electricity price reforms more difficult.
Sri Lanka’s US $ 82 billion economy slowed down after the change of government in 2015 as the Sirisena-Wickramasinghe administration attempted to replace the hitherto state-led, debt-funded and infrastructure-driven growth model with a more private sector-led, investment-driven and tradable goods and services economy.
“Tighter than expected global financial conditions would increase the cost of debt and would make rolling over the maturing Eurobonds from 2019 more difficult,” the World Bank said in its latest ‘South Asia Economic Focus’ report.
Moody’s Investors Service in a note this July about Sri Lanka said an estimated US $ 13.8 billion in external debt is set to mature during 2019 to 2022. Out of that, at least US $ 5 billion account for international sovereign bond settlements.
This leaves Sri Lanka with an extremely limited or virtually zero headroom for fresh borrowings but the authorities may be hoping to roll over such debt — issuing fresh bonds to settle the maturing ones — a trait of a financially troubled nation.
However, the international financial markets could be tighter by then as the central banks in major countries are raising their interest rates as their economies have begun to expand in sync for the first time since the global financial crisis.
As the global interest rates rise, the cost of external financing could also become expensive, making both the external debt servicing and raising new debt a challenge.
This could exacerbate the external risks for Sri Lanka as the foreign exchange flows through exports, tourism, remittances and foreign direct investments have thus far been lacklustre.
But the economists at the World Bank expect these risks to be negated for a certain degree due to continued direct purchases of foreign exchange by the country’s Central Bank, pursuance of a more market-determined exchanged rate and the sale or leasing of the selected government assets such as the Hambantota sea port.
The World Bank also cautioned of increasing poverty levels in the country as a result of the frequent occurrence and impact of natural disasters having an adverse impact on economic growth, fiscal consolidation and trade balance.
The World Bank estimates Sri Lanka to grow no higher than 4.6 percent in 2017 and improve to 5.0 percent during the medium term.
Sri Lanka is estimated to record a fiscal deficit of 5.1 percent of gross domestic product (GDP) in 2017, slightly better than 5.4 percent in 2016.
According to the estimates, for the first time in many years, Sri Lanka is expected to record a surplus in its primary account—state revenue over recurrent expenditure less interest payments on easier state borrowings— of 0.5 percent of GDP in 2017.
Under these circumstances, the World Bank urged the government to stay on course with the fiscal consolidation efforts while shifting towards “private investment-tradable sector-led growth model by improving the trade, investment, innovation and business environment”.
The development lender further advocated improving governance and accountability processes through measures such as the enactment of the Right to Information Act while enhancing state-owned enterprise performance and their service delivery.
Pertaining to the external debt maturing from 2019, the World Bank asked the government to be proactive to mitigate the impact of reforms on the poor and vulnerable with targeted spending and enhancing disaster preparedness.
Rupee ends ...
The rupee has been under pressure since January after the Central Bank stopped defending the currency and started buying the dollar to build up the country’s depleted foreign currency reserves.
The island nation saw Rs.20.1 billion of net inflows into equities this year as of yesterday’s close, and Rs.31.1 billion worth inflows into government securities as of October 4, official data showed.
Philippines’ Duterte ...
In an executive order dated September 28 that was made public yesterday, Duterte ordered the Land Bank of the Philippines to acquire Philippine Postal Savings Bank Inc. and turn it into an Overseas Filipino Bank. State-owned Philippine Postal is a thrift bank with assets of 9.29 billion pesos (US $ 181.4 million).
“There is a need to establish a policy bank dedicated to provide financial products and services tailored to the requirements of overseas Filipinos and focused on delivering quality and efficient foreign remittance services,” the executive order read.
Filipinos who live and work abroad typically rely on private money transfer agencies, despite high transaction charges.
The creation of a specialised bank is among the campaign promises of Duterte, who won the presidency by a large margin last year. Duterte is mobbed by large crowd of Filipinos abroad during his official trips in Asia and Middle East, where there are large concentrations of contract workers.
Cash remittances in the first seven months of the year rose 5 percent from a year earlier to US $ 16.095 billion, the central bank data showed. The bulk of remittances came from the United States, United Arab Emirates, Saudi Arabia, Singapore, Japan and Britain.
South Asia ...
Meanwhile, Pakistan’s economy continued its upward momentum and is projected to accelerate to more than 5.0 percent in 2017 and 2018, “if deficits are well managed”.
“Nepal has seen an economic rebound after natural disaster and political shocks but its recovery may be impacted by the recent flooding and other factors,” the World Bank said, estimating a growth of 7.5 percent for this year but 4.6 percent in 2018.
The World Bank said the economy in Bangladesh remains strong with accelerating industrial production and resilient services. Growth is expected to be above 7 percent in 2017 and 2018.
“However, deficits are widening as export growth and remittances have weakened, which should be monitored and addressed along with increasing stresses on the financial sector and uncertainties around the upcoming elections.”
Meanwhile, the economic activity in Bhutan, which has a gross national happiness index, has kept growth strong with the economy expected to grow at 6.6 percent in 2017 and 6.7 percent in 2018.
“Hydropower projects, supportive policies combined with low inflation, a stable exchange rate and greater financial reserves have contributed to growth and poverty reduction. However, risks are emerging, including possible delays in hydropower construction and the slowdown in growth in India,” the World Bank said.
The Nepal economy is estimated to rebound to 7.5 percent but would slow down in 2018 due to the heaviest floods in decades, slow recovery of exports and an increase in lending rates.
Afghanistan will grow by 2.6 percent and 3.4 percent during 2017 and 2018, respectively, as economic recovery remains slow with continuing insecurity curbing private investment and consumer demand, the World Bank said.
Shares end ...
Foreign investors bought a net Rs.225.2 million worth of equities yesterday extending the year-to-date net foreign inflow to Rs.20.1 billion worth of shares.
Turnover stood at Rs.1 billion, more than this year’s daily average of Rs.923.9 million.
“Market is very positive with continued foreign buying, though the index ended negative,” said First Capital Holdings Head of Research Dimantha Mathew.
“The index came down mainly because of the profit-taking in Commercial Bank shares,” he added.
Shares of biggest listed lender Commercial Bank of Ceylon PLC ended 1.2 percent down, while conglomerate John Keells Holdings PLC closed 0.3 percent lower and Commercial Leasing and Finance PLC finished 3.3 percent down.
Tourism momentum ...
Tourist arrivals from all major regional markets fell this September, except for South Asia, where the market expanded 9.5 percent year-on-year (YoY), hauling in 44,853 tourists.
This was mainly due to 34,481 Indians visiting the island during September, which was an increase of 26.6 percent YoY.
However, it is now widely known that many Indians visit Sri Lanka with tourist visas in order to work illegally, casting doubts on the arrival figures, which incidentally, many tourism firms do not trust, according to a recent research done by the Ceylon Chamber of Commerce.
Pakistanis were the only others in the neighbouring region who had had a greater appetite for visiting Sri Lanka, ironically, ahead of a cricket series between the two countries, which is currently ongoing in the UAE.
Meanwhile, 39,610 tourists arrived from the Western European region, registering a 0.9 percent fall YoY. Of the main source markets in the region, arrivals from the UK increased 2.5 percent YoY to 8,574 tourists.
This was despite a fall in real wages for Brits following the Brexit referendum, the delayed negative impacts of the referendum now plaguing Sri Lanka’s former colonial master.
The increase in arrivals from Britain falls in line with analysis from Bartleet Religare Securities, which noted that Sri Lanka would benefit from Brexit as the British switch from more luxurious destinations to Sri Lanka.
Meanwhile, the major German and French markets in the Western European region fell, with arrivals from the former falling 15.1 percent YoY to 8,574 tourists, while arrivals from the latter falling 7.4 percent YoY to 4,637 tourists.
This is despite Sri Lanka hosting French Travel Agents Congress 2016, which during its previous editions had brought substantially increased arrivals to a host nation.
The relatively smaller Dutch and Spanish markets however recorded strong growth during September.
Visitors coming from East Asia fell 8.9 percent YoY to 31,127, influenced mainly by the continued disinterest of the Chinese in Sri Lanka this year, following a boom last year. The Chinese market contracted 14.3 percent YoY, attracting 18,939 tourists to the island.
The Japanese market however grew 5.5 percent YoY to 4,254 tourists.
In the mid-sized markets, arrivals from the Middle East fell 19.3 percent YoY to 9,331 tourists, while arrivals from Eastern Europe fell 21.8 percent YoY to 6,044 tourists.
The Australasian market expanded 4.6 percent YoY to 7,151 tourists, while the American market fell 4.7 percent YoY to 5,532 tourists.
Over the first nine months of this year, arrivals to Sri Lanka increased 2.9 percent YoY to 1.55 million tourists. The Western European market brought in 516,789 tourists, up 6.4 percent YoY. The South Asian market fell 0.2 percent YoY bringing in 360,355 tourists and the East Asian market grew 2.9 percent YoY to 335,105 tourists.
Sri Lanka ...
It is time we publicise the policy more and start implementing it.”
Bathiudeen thereafter directed his top officials to work on a schedule for speedy implementation of the policy and assist the more than one million registered SMEs and another large number of unregistered SMEs across the country that are expected to reap benefits from it.
In his recent policy statement to parliament, the prime minister stressed the importance of SMEs.
“Local entrepreneurs must now enter the global markets. We will help them enhance their productivity levels and develop competitiveness,” said Wickremesinghe.
The SME framework policy document is now available for download at neda.gov.lk.