Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

<ul>
<li>Dissanayake, representing the communist JVP (which has never won more than 10% of any nationwide vote) has 48% support in the latest poll before today's presidential election. </li>
<li>IMF's EFF is Sri Lanka's economic lifeline. Via it, President Wickremasinghe has restored 5% real GDP growth, lowered inflation, swung the current account to surplus and rebuilt FX reserves. </li>
<li>External debt is 10x FX reserves, so Dissanayake's plans to cut tax rates, eliminate VAT on food/health/education would jeopardize the IMF program. Hopefully the election outcome differs from that poll. </li>
</ul>


Dissanayake, representing the communist JVP (which has never won more than 10% of any nationwide vote) has 48% support in the latest poll before today's presidential election. 
IMF's EFF is Sri Lanka's economic lifeline. Via it, President Wickremasinghe has restored 5% real GDP growth, lowered inflation, swung the current account to surplus and rebuilt FX reserves. 
External debt is 10x FX reserves, so Dissanayake's plans to cut tax rates, eliminate VAT on food/health/education would jeopardize the IMF program. Hopefully the election outcome differs from that poll. 


Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

<ul>
<li>With foreign reserves down to US$1.939bn in Mar'22 (less than a month's import cover), Sri Lanka announced a default on its US$7bn of external debt payments this year. </li>
<li>External debt (US$51bn) is 424% of exports, with a debt service ratio of 39.3%. Public debt (119% of GDP) is unsustainable too, with the primary balance 8%ofGDP away from sustainability. </li>
<li>Painful structural reform is needed, reforming the labour market, privatizing government companies and widening the basket of exportable goods and services, possible only after a change of government. </li>
</ul>


With foreign reserves down to US$1.939bn in Mar'22 (less than a month's import cover), Sri Lanka announced a default on its US$7bn of external debt payments this year. 
External debt (US$51bn) is 424% of exports, with a debt service ratio of 39.3%. Public debt (119% of GDP) is unsustainable too, with the primary balance 8%ofGDP away from sustainability. 
Painful structural reform is needed, reforming the labour market, privatizing government companies and widening the basket of exportable goods and services, possible only after a change of government. 


Sri Lanka's Sovereign Default: Painful Structural Reform Needed

Asia Fixed Income Analyst

Derek Silva

Market Securities (Dubai)

Market Securities (Dubai) Limited ('MSD') is an independent financial intermediary specialising in financial products. The client base is large financial institutions based in various locations around the globe. The company is based in the Dubai International Financial Centre (DIFC) and is regulated by the Dubai Financial Services Authority (DFSA).

MSD's Cross Asset Team provides institutional investors access to multi-asset services through desks in London and Dubai, including EM fixed income, cross asset derivatives, relative value, risk arbitrage, funds and ETFs. Market Securities has access to a broad range of execution services through the office network in London, Paris, New York and Dubai. 

Market Securities’ Cross Asset Team is a unique group of specialists focusing on emerging market fixed income strategies. The team derives investment insights from cross asset inputs. 
MSD's Cross Asset team combines nearly 20 years of average global investment experience covering both buy and sell side, with the core team having worked together for 15 years. Over the years, the team has built a strong network of individuals and institutions to gain access to information and investment insights.

The team was established to service the growing needs of Tier 1 investors in an independent and unbiased manner. The team is passionate, opinionated and disciplined.

You can get in touch with the Market Securities team:

Derek Silva <derek.silva@market-securities.com> (Asia Fixed Income Analyst)
Ville Kuokka <ville.kuokka@market-securities.com> (MENA/EM Analysis/Execution)
Mika Parviainen <mika.parviainen@market-securities.com> (MENA/EM Analysis/Execution)

Credit

Sri Lanka Government International Bond / Credit

<ul><li>SRILAN bonds are gradually recovering after successful new loans and swaps have helped with liquidity. But these short-term stopgaps don’t help the deeper structural debt problem.</li><li>Foreign reserves are rapidly depleting, from $6.9bn to $4.0bn in less than a year.</li><li>Imports dominate exports while FDI is weak and cannot keep up with foreign currency outflows to repay debt – these both lead to frequent Balance of Payments crises.</li><li>The only real saviour for Sri Lanka is the IMF, but it refuses to ask the IMF for help – and IMF help is anyway dependent on BoP stability, which is only worsening for Sri Lanka.</li><li>It’s not only the amount of debt, but also the composition of debt, as today’s debt repayment burden is much heavier than before.</li><li>Very short dated SRILAN bonds are trading near par. For bonds beyond one year, there’s more upside. But with ~$4bn of debt service obligations and large bond maturities each year until 2030, we have no confidence in Sri Lanka avoiding default without IMF help. We dislike SRILAN bonds.</li></ul>

SRILAN bonds are gradually recovering after successful new loans and swaps have helped with liquidity. But these short-term stopgaps don’t help the deeper structural debt problem.Foreign reserves are rapidly depleting, from $6.9bn to $4.0bn in less than a year.Imports dominate exports while FDI is weak and cannot keep up with foreign currency outflows to repay debt – these both lead to frequent Balance of Payments crises.The only real saviour for Sri Lanka is the IMF, but it refuses to ask the IMF for help – and IMF help is anyway dependent on BoP stability, which is only worsening for Sri Lanka.It’s not only the amount of debt, but also the composition of debt, as today’s debt repayment burden is much heavier than before.Very short dated SRILAN bonds are trading near par. For bonds beyond one year, there’s more upside. But with ~$4bn of debt service obligations and large bond maturities each year until 2030, we have no confidence in Sri Lanka avoiding default without IMF help. We dislike SRILAN bonds.

Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment.

Sri Lanka's public debt was 100% of GDP in 2020, and its primary fiscal deficit is officially estimated to be 4% of GDP this year, implying that the government has chosen to stay on an unsustainable fiscal path. External debt is even more precarious, with foreign reserves (US$4.8bn in January 2021) far below short-term external debt, and a deteriorating basic balance (with large portfolio outflows in recent quarters, and negligible FDI inflow). Without an IMF program, the RBI declined to roll-over a currency swap in February 2021, although China provided an additional RMB10 billion swap on 23 March 2021. China's support is a poisoned chalice (with an "unequal treaty" already handing one port, Hambantota, to China's control), but even with that Sri Lanka will struggle to make the US$4 billion of external debt repayments this year, and larger ones in the next 4 years. We recommend staying well clear of Sri Lanka bonds due in 2022 and beyond. Sovereign defaults are rare in Asia, and Sri Lanka prides itself on never having defaulted on its external debts. But with foreign reserves down to US$4.8 billion in January 2021 (of which US$1.37 billion comprised currency swaps with other central banks), while short term external debt was estimated at US$9 billion, Sri Lanka's external liquidity situation was extremely precarious. On 23 March 2021, Sri Lanka signed a RMB10 billion (over US$1.5 billion) swap facility with China, which should enable repayment of the US$1 billion sovereign bond that matures on 27 July 2021. But the Reserve Bank of India (RBI) had declined to roll-over a US$400 million swap in February 2021, and the Rajapaksa government has ruled out turning to the IMF, leaving it with very few other options. External debt repayments for each of the next 5 years are US$4-5 billion annually, and total external debt is 285% of Sri Lanka's annual exports of goods &amp; services (far above the average of 110% for all developing economies). The external debt service ratio has been above 30% for the past two years, well above the 25% level that is considered risky. Public debt reached 100% of GDP in 2020 (up from 79.9% in 2017 and 86.3% in 2019), and the primary fiscal deficit is officially expected to be 2.5% of GDP in 2020 and 4% of GDP in 2021. So the public debt will stay on an unsustainable path, rising (by Fitch's estimate) to 116% of GDP in 2022. In 2020, the domestic public debt was financed primarily through a huge 62.7% YoY increase in net credit to government (81% of it from commercial banks), which caused M2 money supply to expand 23.4% YoY in 2020, the fastest expansion in more than 25 years. Rapid monetary expansion didn't cause inflation to rise much in 2020 (with recession causing a large output gap that would have depressed price levels). Money supply will perforce decelerate in 2021 as the economy returns to normalcy, and net credit to government must decelerate sharply too. Massive government borrowings will cause domestic bond yields to rise, making public debt even more unsustainable. The Rajapaksa government has spoken of two approaches to meeting its external obligations -- using non-debt capital flows to finance the current account deficit (which is relatively small at 2% of GDP), and the "Malaysia template" (1998) of capital controls (supplemented by import controls). The Malaysia template is irrelevant, because Malaysia had a much more diversified export base (huge electronics exports, not just commodities like palm-oil, rubber, crude oil which responded very strongly to the depreciated ringgit), much larger ongoing FDI inflows (4% of GDP, while Sri Lanka rarely receives more than 1% of GDP worth of FDI), and used the capital controls to rapidly resolve its banks' bad-loan problem; Malaysia did not have public or external debt challenges remotely as large as Sri Lanka does. FDI as a source of funding for Sri Lanka's current account deficit has diminished rapidly (to just US$743 million, 0.8% of GDP, in 2019, and US$434 million, or 0.5% of GDP in 2020), and foreign portfolio outflows have grown steadily in each of the past 6 quarters (to US$1,149 million in 4Q 2020, a quarter in which FDI inflow was just US$ 89 million). Apart from a tyre-manufacturing proposal from a mid-sized Chinese producer (not among the top-30 in the world or the top-5 in China), no significant FDI is in the pipeline. So foreign reserves are likely to continue declining, and Sri Lanka will face an external payments crisis by October 2021 in the absence of even larger lending by China -- which (like in Hambantota port) will involve covenants that give China ownership of Sri Lankan land and other assets in the event of non-payment. 

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

In our last report dated 12-May-20 ( <a href="https://www.smartkarma.com/insights/sri-lanka-no-default-this-year" target="_blank" data-smartkarma-citation="insights:39301" rel="noopener">SRI LANKA: No Default This Year</a> ), we highlighted the fact that Sri Lanka will not default this year. We also compared <a href="https://www.smartkarma.com/entities/sri-lanka-government-international-bond" target="_blank" data-smartkarma-citation="entities:28349:1" rel="noopener">Sri Lanka Government International Bond (SRILAN GOVT)</a> with its closest Asian peers such as Mongolia, Papua New Guinea, Tajikistan, Pakistan, and Iraq. In this report, we update with recent events on the country and relative valuation of Sri Lanka’s SRILAN complex.
Despite deterioration in macroeconomic fundamentals (falling revenue vs. USD1bn debt instalment in October) further worsened by COVID-19, we remain confident that it is unlikely for Sri Lanka to default on its debt obligations in the next 12 months, given its success in securing new credit facilities partially offset by a suspension of IMF Extended Fund Facility (EFF) this month.  
S&amp;P’s downgrade of Sri Lanka’ s issuer credit rating to B- from B should lead to Moody’s downgrade of the same rating to B3 from B2 in October in the worst case scenario of which we do not believe investors will be surprised with. We have viewed Sri Lanka as a B- sovereign credit and at the “B-“ range, and we see the SRILAN complex as attractive versus peers despite a rally. We like SRILAN 21s to 24s as the most attractive within the SRILAN complex and assign our OVERWEIGHT recommendation. We assign a NEUTRAL recommendation to the rest of the SRILAN complex.
The Asian USD bond universe has outperformed since many countries exited the first wave of COVID-19. Our base case scenario calls for the mass adoption of vaccines to be at least a year away and we expect the default trend to head upward and the global economy to slowly make a comeback, starting in 2022. That said, we expect a depressed yield environment to make Asian USD bonds attractive versus developed market USD bonds. That said, we expect defensive sectors such as sovereign, telecommunications, utilities, insurance, and defence to outperform cyclical sectors towards 2021. We also like issuers which will be supported implicitly and explicitly by sovereign credits.

In our last report dated 12-May-20 ( SRI LANKA: No Default This Year ), we highlighted the fact that Sri Lanka will not default this year. We also compared Sri Lanka Government International Bond (SRILAN GOVT) with its closest Asian peers such as Mongolia, Papua New Guinea, Tajikistan, Pakistan, and Iraq. In this report, we update with recent events on the country and relative valuation of Sri Lanka’s SRILAN complex.
Despite deterioration in macroeconomic fundamentals (falling revenue vs. USD1bn debt instalment in October) further worsened by COVID-19, we remain confident that it is unlikely for Sri Lanka to default on its debt obligations in the next 12 months, given its success in securing new credit facilities partially offset by a suspension of IMF Extended Fund Facility (EFF) this month.  
S&amp;P’s downgrade of Sri Lanka’ s issuer credit rating to B- from B should lead to Moody’s downgrade of the same rating to B3 from B2 in October in the worst case scenario of which we do not believe investors will be surprised with. We have viewed Sri Lanka as a B- sovereign credit and at the “B-“ range, and we see the SRILAN complex as attractive versus peers despite a rally. We like SRILAN 21s to 24s as the most attractive within the SRILAN complex and assign our OVERWEIGHT recommendation. We assign a NEUTRAL recommendation to the rest of the SRILAN complex.
The Asian USD bond universe has outperformed since many countries exited the first wave of COVID-19. Our base case scenario calls for the mass adoption of vaccines to be at least a year away and we expect the default trend to head upward and the global economy to slowly make a comeback, starting in 2022. That said, we expect a depressed yield environment to make Asian USD bonds attractive versus developed market USD bonds. That said, we expect defensive sectors such as sovereign, telecommunications, utilities, insurance, and defence to outperform cyclical sectors towards 2021. We also like issuers which will be supported implicitly and explicitly by sovereign credits.

SRI LANKA: Surviving Between a Rock and a Hard Place

Sri Lanka

Sri Lanka Government International Bond (SRILAN GOVT)

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Sri Lanka Government International Bond (SRILAN GOVT)

Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...

Prasenjit K. Basu

Sri Lanka's Sovereign Default: Painful Structural Reform Needed

Public debt is 119% of GDP, and the primary balance 8%ofGDP away from from sustainability. A new government must undertake painful structural...

Prasenjit K. Basu

Sri Lanka: Market Insight

SRI LANKA: GETTING BACK ON TRACK OR JUST BUYING TIME? SRILAN bonds are gradually recovering after successful new loans and swaps. But there is a...

Market Securities (Dubai)

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Sri Lanka's public debt is 100% of GDP, & 2021 primary fiscal deficit 4% of GDP. External debt is 440% of goods exports, foreign reserves are...

Prasenjit K. Basu

SRI LANKA: Surviving Between a Rock and a Hard Place

In our last report dated 12-May-20, we highlighted the fact that Sri Lanka will not default this year. We also compared Sri Lanka with its closest...

Bondcritic

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Sri Lanka: Election Could Jeopardise Hard-Earned Economic Gains, but Hopefully Won't

​Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...

Prasenjit K. Basu

Sri Lanka's Sovereign Default: Painful Structural Reform Needed

Public debt is 119% of GDP, and the primary balance 8%ofGDP away from from sustainability. A new government must undertake painful structural...

Prasenjit K. Basu

Sri Lanka: Market Insight

SRI LANKA: GETTING BACK ON TRACK OR JUST BUYING TIME? SRILAN bonds are gradually recovering after successful new loans and swaps. But there is a...

Market Securities (Dubai)

Sri Lanka: Closer to Being Asia's Argentina Despite Swaps from PRC's Poisoned Chalice

Sri Lanka's public debt is 100% of GDP, & 2021 primary fiscal deficit 4% of GDP. External debt is 440% of goods exports, foreign reserves are...

Prasenjit K. Basu

SRI LANKA: Surviving Between a Rock and a Hard Place

In our last report dated 12-May-20, we highlighted the fact that Sri Lanka will not default this year. We also compared Sri Lanka with its closest...

Bondcritic

Communist JVP's Dissanayake has 48% support in last poll, substituting SLPP. Unless electoral outcome differs, SL's IMF program would be...