Fitch warns on Sri Lanka local bonds

Sri Lanka is contending with a high risk of default on its local currency bonds as it seeks to reduce debt, key to winning financing from the International Monetary Fund to bring relief to the crisis-hit island.

Fitch Ratings’s ‘CCC’ rating on long-term local currency debt that was affirmed in May “reflects a high risk that local-currency debt will be included in debt restructuring,” Sagarika Chandra, Hong Kong-based associate director, wrote in a statement. Sri Lanka had $30 billion of foreign debt and $34 billion of domestic debt as of the end of April.

Sri Lanka defaulted on its dollar debt in May for the first time, and must clinch a restructuring deal with private bondholders and official creditors including China, Japan, and India to get the IMF board’s nod for a $2.9 billion loan. The nation faces a lawsuit in a US court over its proposed debt recast, with one of the bondholders, Hamilton Reserve Bank Ltd., accusing Sri Lanka of setting terms that favor domestic banks.

“There is a big question mark over whether sustainable levels of debt can be reached by just restructuring US dollar market and concessional debt,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn in Singapore.

“Arguably, local currency debt needs to be restructured too in order to reach what the IMF would see as sustainable levels.”