Sri Lanka falls into arrears, warns that inflation could rise to 40%

Sri Lanka falls into arrears, warns that inflation could rise to 40% – Mail Bonus

Sri Lanka has gone bankrupt for the first time in its history as the government struggles to halt an economic collapse that has sparked mass protests and a political crisis.

Policy makers had informed creditors that the nation would not be able to pay until the debt has been restructured and is therefore in default, said Governor Nandalal Weerasinghe at a briefing on Thursday. The coupon payments, which were originally due on April 18, totaled USD 78 million on banknotes due in 2023 and 2028, with a 30-day deadline expiring on Wednesday.

Sri Lanka has been embroiled in turmoil amid rising inflation – which Weerasinghe expects to reach 40% in the coming months – a declining currency and economic crisis that have left the country with the hard currency it needs to import food and fuel. Public outrage has erupted into violent protests, prompting the government to announce last month that it would suspend payments of $ 12.6 billion in foreign debt to preserve cash for essentials.

It marks the state’s first default on government debt since gaining independence from Britain in 1948. Its bonds are among the worst in the world this year, trading deep in emergencies, with owners expecting a loss of close to 60 cents a dollar.

Many of Sri Lanka’s bonds have so-called default clauses, which default on all outstanding dollar debt if there is a default on one bond. On the debt due in 2023 and 2028, the provision is activated if any payment exceeding USD 25 million is not met. The country was already declared in arrears by S&P Global Ratings at the end of April.

Sri Lanka is in talks with the International Monetary Fund on bailouts and needs to negotiate a debt restructuring with creditors. The country has previously said that it needs between 3 and 4 billion dollars this year to get out of the crisis.

“It’s not surprising,” said Guido Chamorro, head of emerging market hard currency debt at Pictet Asset Management, which owns Sri Lanka bonds. “It was well flagged and mostly priced with most bonds priced in the thirties.

Increased global credit due to a number of factors – Central Bank interest rate hikes, rising commodity costs, the war in Ukraine – has had a devastating effect on the low-income country, which is the largest government issuer of dollar-denominated bonds. in Asia. And all this after the pandemic reduced tourism revenues by more than three quarters.

Weerasinghe said on Thursday that he would like to see the finance minister appointed to sign any kind of aid agreement. However, the political situation has improved with the appointment of the Prime Minister and Weerasinghe said it gives him comfort to continue his work. Last week, he had threatened to quit if political stability did not return soon.

“With the prime minister and government in place, and the parliament in session, Sri Lanka is in a better place and seems to be moving in the right direction,” Weerasinghe said. This is perhaps the best time to invest in Sri Lanka as we offer attractive returns, he added.

JPMorgan Chase & Co. reviewed the weight of dollar-denominated bonds in Sri Lanka on Wednesday, saying recent events point to political stability, which could pave the way for IMF talks and debt restructuring talks.

The restructuring could take about six months, although the situation makes it difficult to predict the exact timing, Weerasinghe said. He added that proposals for legal advice for the restructuring will be submitted to the government soon. The International Monetary Fund could also issue a statement on Friday when the project is completed, Weerasinghe said.

Sri Lankan bonds were mixed on Thursday but higher than their record lows last week, indicating that traders expect better recovery value. Dollar bonds maturing in 2030 were 0.28 cents lower at 38.39 cents a dollar and banknotes in July were 0.22 cents higher or 42.78 cents, according to data compiled by Bloomberg. The Colombo All-Share Index fell more than 3% following the sale of international equities.

“Problems are not the end, they can signal a new beginning,” Chamorro said. “Now the hard work begins”

With assistance from Srinivasan Sivabalan, Carolina Wilson, Anusha Ondaatjie and Asantha Sirimanne.

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