Sri Lanka default: Sri Lanka enters default, warns inflation could rise to 40%

Sri Lanka fell into default for the first time in its history as the government struggled to stave off an economic downturn that sparked mass protests and a political crisis.

Policymakers have flagged lenders that the nation will not be able to repay until debt is restructured, and therefore pre-approved defaults are in place, Central Bank Governor Nandalal Warasinghe said in a briefing on Thursday. Coupon payments with maturity notes for 2023 and 2028 were valued at 18 78 million on April 18, with a 30-day grace period ending Wednesday.

Sri Lanka is mired in turmoil amid rising inflation – which is set to accelerate to 40% next month in Warasinghe – a downward spiral and an economic crisis that has left the country short of the hard currency needed to import food and energy. The public outcry erupted in violent protests and led the government to announce last month that it would stop repaying its $ 12.6 billion foreign debt pile to save cash for essential goods.

It is the country’s first sovereign debt defaulter since gaining independence from Britain in 1948. Its bonds are among the worst performers in the world this year and are trading deep in the volatile region, with holders ready for losses of around 60 cents on the dollar.

Many Sri Lankan bonds have so-called cross-default clauses, which, if a bond has a miss payment, draws all outstanding dollar debt by default. On outstanding loans in 2023 and 2028, the clause is triggered if more than 25 25 million is not paid. The country had already been declared as election defaulter by S&P Global Ratings in late April.

Sri Lanka is in talks with the International Monetary Fund for a bailout and needs to negotiate a debt restructuring with lenders. The country has previously said it needs 3 3 billion to 4 4 billion this year to pull itself out of the crisis.

“This is not a surprise,” says Guido Chamorro, co-head of emerging-market hard-currency lending to Picet Asset Management, which holds Sri Lankan bonds. “It was well flagged and was priced mostly with bonds priced in the high 30s.”

Rising Federal Reserve interest rates, rising commodity prices, the war in Ukraine – which has brought tough global debt for a variety of reasons – have had a devastating effect on the low-income country, the largest sovereign issuer of junk dollar bonds. In Asia and after epidemic tourism revenue fell by more than three-quarters.

Weresinghe said on Thursday that he would like to see a finance minister appointed to sign any aid agreement. However, the political situation has improved with the appointment of a new prime minister, and Warasinghe says he is relieved to continue his job. He threatened to resign last week if political stability did not return soon.

“With the Prime Minister and the Cabinet and Parliament sitting, Sri Lanka is in a good place and seems to be moving in the right direction,” he said. “This is probably the best time to invest in Sri Lanka because we offer an attractive rate of return,” he added.

JPMorgan Chase & Co. Sri Lanka’s dollar weighed heavily on bonds on Wednesday, saying recent developments point to political stability, which could pave the way for talks between the IMF and debt restructuring.

Reconstruction could take about six months, although the situation makes it difficult to accurately predict the timeline, Warasinghe said. He added that the recommendations of the legal advisers for restructuring would be submitted to the cabinet soon. The IMF could also issue a statement on Friday as the mission draws to a close, Warasinghe said.

Sri Lankan bonds were mixed on Thursday but higher than their record lows last week, with traders expecting better recovery rates. According to data compiled by Bloomberg, outstanding dollar bonds were down 0.28 cents at .3 38.39 cents in 2030 and outstanding notes were up 0.22 cents at 42.78 cents in July. The Colombo All-Share Index fell more than 3% in global equity sales.

“The default is not the end, they could signal a new beginning,” Chamoro said. “Now the hard work begins.”

Assisted by Srinivasan Shivabalan, Carolina Wilson, Anusha Ondatji and Asantha Sirimane.

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