Economy
Factbox-Sri Lanka asks foreign investors for a 30% haircut in debt restructure
© Reuters. FILE PHOTO: A worker cleans a hotel’s window, as a national flag waves at a seafront tent camp that became the focal point of months-long nationwide demonstrations, as the deadline police asked protesters to leave the camp is approaching, amid the country
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(Reuters) -Sri Lanka announced a restructuring plan for its massive domestic debt on Thursday to meet targets set by the International Monetary Fund (IMF) and aim to turn around its economy, which has been hammered by a financial crisis.
The island nation is asking foreign investors in its international sovereign bonds to take a 30% haircut and is seeking similar concessions from holders of its other dollar-denominated bonds as it seeks to restructure its debt, its central bank governor.
A severe shortage of dollars tipped the country of 22 million people into its worst financial crisis since independence from Britain in 1948, triggering its first foreign debt default in May 2022.
WHAT HAS HAPPENED SO FAR?
Pledging to put its mammoth debt burden on a sustainable track, Sri Lanka locked down a $2.9 billion bailout from the IMF in March. The domestic debt restructure is needed to help the country reach the IMF programme goal of reducing overall debt to 95% of GDP by 2032.
On Thursday, the country’s central bank unveiled the restructuring plan, which includes exchanging treasury bills into long-term bonds.
WHAT WILL THE DOMESTIC DEBT RESTRUCTURING INCLUDE?
Under the domestic debt revamp, holders of locally issued dollar-denominated bonds such as Sri Lanka Development Bonds (SLDBs) will be given three options, central bank governor Nandalal Weerasinghe said.
The first would be treatment similar to investors in the country’s international sovereign bonds – a 30% principal haircut with a 6-year maturity at a 4% interest rate.
“We are asking foreign debt holders for a 30% haircut but that is still under discussion,” Weerasinghe said.
Sri Lanka currently has $12.5 billion in international sovereign bonds.
Domestic bondholders will be given two other options:
– Similar treatment to that being proposed to bilateral dollar creditors: No principal haircut, with a 15-year maturity and 9-year grace period at 1.5% interest rate.
– Exchange their holdings for local currency denominated instruments: No principal haircut with a 10-year maturity at the SLFR (Sri Lanka Standing Lending Facility Rate) + 1% interest rate.
OTHER POINTS IN THE DOMESTIC DEBT REVAMP
• Local currency bonds held by superannuation funds proposed to be exchanged for longer maturity bonds (2027 to 2038), with a step-down coupon structure of 12% (till 2025E) and 9% till maturity.
• Central Bank of Sri Lanka (CBSL) holdings of Treasury bills to be converted to bonds maturing between 2029 and 2038, with a step-down coupon structure. This will be implemented in Phase 2 of the domestic debt restructuring.
• Treasury bills and Treasury bond holdings of the banking sector have been excluded from the domestic debt restructuring considering the significant stress on the banking sector at present due to increasing non-performing loans, impact of external debt restructure and high taxation.
WHY IS THE DOMESTIC DEBT REWORK CRITICAL?
Treasury Secretary Mahinda Siriwardana said on Thursday that the restructuring would cover part of the country’s $42 billion in domestic debt.
The domestic restructuring is likely to create momentum around foreign debt renegotiations on $36 billion of external debt, including $24 billion held by bondholders and bilateral creditors such as China, Japan and India.
Sri Lanka has set a goal of finalising debt restructuring talks by September to align with the first review of its IMF programme.
WHAT ELSE DOES THE IMF WANT?
In addition to reducing debt to GDP to 95% by 2032, Sri Lanka also has to ensure average gross financing needs remain below 13% of GDP between 2027-2032 and annual foreign exchange debt service of the central government should remain below 4.5% of GDP during the same period.
The debt restructuring is also crucial for Sri Lanka to reach a 2.3% primary surplus by 2025, the key fiscal target set by the IMF.
Debt servicing reduction up to 2027 should close external financing gaps of $16.9 billion.
WHAT’S NEXT?
The domestic restructuring framework will now be presented to parliament on Saturday for approval. CBSL hopes to finalise the bond exchange of superannuated funds by July end.
HOW WILL POTENTIAL FALLOUT BE PREVENTED?
Aiming to contain any potential market volatility, Sri Lanka declared a five-day holiday from June 29 to July 3.
The special bank holidays also allow any losses from bond sales to be recognised in the third quarter of the year, analysts said.
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo
SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.
With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.
The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.
China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.
The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.
“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.
The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.
($1 = 7.1315 renminbi)
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
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