Category: News

The merchandise trade balance recorded a surplus in June 2022 for the first time since August 2002, reflecting the impact of historically high monthly export earnings and the continued decline in import expenditure, says the Central Bank of Sri Lanka (CBSL).

The balance in the merchandise trade account in June 2022 recorded a surplus of US dollars 21 million, compared to the deficit of US dollars 652 million recorded in June 2021, and for the first time since August 2002, where a trade surplus of US dollars 110 million was recorded.

Meanwhile, the cumulative deficit in the trade account during January-June 2022 narrowed to US dollars 3,514 million from US dollars 4,316 million recorded over the same period in 2021.

Earnings from tourism recorded an increase in June 2022 (year-on-year) from the low base, despite the negative sentiments associated with travel advisories and the ongoing shortage of fuel and resultant transportation difficulties, the CBSL said.

Workers’ remittances moderated in June 2022, compared to May 2022, reflecting an increase of grey market activity of foreign exchange transactions, according to data on the External Sector Performance for June 2022.

Foreign investment in the government securities market recorded a marginal net inflow, while that in the Colombo Stock Exchange (CSE) recorded a marginal net outflow during June 2022.

The Central Bank says it continued to provide forex liquidity to finance essential imports, exhausting the usable level of gross official reserves.

Meanwhile, the weighted average spot exchange rate in the interbank market remained around Rs. 360 per US dollar during the month.

The Indian navy is monitoring the movements of a Chinese research vessel that is bound for Sri Lanka’s Hambantota port, Indian online newspaper ThePrint reported quoting sources in the defense and security establishment.

The vessel is scheduled to dock at Hambantota port in mid-August, ThePrint has learnt. However, the exact purpose of the vessel’s visit to Hambantota is unclear. It remains to be seen whether it is going to the port for turnaround, replenishment, logistics, or signaling, according to sources.

The sources also explained that such vessels start their movement when China or any other country is carrying out missile tests, adding: “It is not a military vessel though. Such Chinese vessels have operated in the area before, and we have always monitored their activity.”

The Chinese research vessel — called the Yuan Wang 5 — is reportedly involved in space and satellite tracking. After first denying reports of its expected arrival at Hambantota port, Sri Lanka’s Defense Ministry confirmed Saturday that the vessel would be docking at the port between 11 and 17 August.

This came after Arindam Bagchi, spokesperson of India’s external affairs ministry, alluded to the Chinese vessel while telling the media Thursday that India “carefully monitors any development having a bearing on its security and economic interests”.

Consequently, Reuters reported that China Friday said that it hoped “relevant parties” would refrain from interfering with its “legitimate maritime activities”. According to the report, the “Yuan Wang 5 is one of China’s latest generation space-tracking ships, used to monitor satellite, rocket and intercontinental ballistic missile launches”.

The Yuan Wang 5 is a third generation vessel in the Yuan Wang class series and entered service in 2007. It has a displacement of 25,000 tonnes and can hold out against a maximum wind scale of 12. The Yuan Wang 5 was built by the state-owned Jiangnan Shipyard in Shanghai. It reportedly also has an aerial reach of 750 km. The Yuan Wang 5s are operated by the Strategic Support Force of the People’s Liberation Army (PLA).

Several opposition parties representing minority communities are considering joining an all-party government proposed by President Ranil Wickremesinghe.

The Democratic People’s Front (DPF) led by Mano Ganesan, All Ceylon Makkal Congress (ACMC) under Rishad Bathiudeen and the Sri Lanka Muslim Congress (SLMC) led by Rauff Hakeem are considering the proposal, party representatives confirmed.

President Wickremesinghe wrote to MPs on Friday requesting them to join a national all-party programme to “create economic and social stability.”

DPF Leader Mano Ganesan told the Sunday Times they had received the invitation and were considering the matter. He said the party believed it was not the time to topple the government given the present economic difficulties.

The ACMC’s politburo will discuss the President’s proposal and a decision will be taken by its central committee, General Secretary Ameer Ali said.

SLMC Chairman Nizam Kariapper said his party was closely monitoring steps being taken by the President and would take a decision soon.

In his letter to MPs, President Wickremesinghe proposed to initiate a broad dialogue to discuss steps including the reintroduction of the 19th amendment and the Parliamentary Oversight Committee System.

A new draft Bill of the Government’s proposed 22nd Amendment to the Constitution is to be taken up for discussion at the Cabinet meeting tomorrow (1 August), The Sunday Morning learns.

The Justice Ministry last week sent the new draft Bill to the Cabinet Secretary to be included in the agenda of Monday’s Cabinet meeting to be taken up for discussion and decision.

Justice Minister Dr. Wijeyadasa Rajapakshe told The Sunday Morning that the new draft 22nd Amendment would be gazetted once the Cabinet granted approval and presented it to Parliament seven days after the gazette was issued.

When asked about the provisos that were included in the previous 22nd Amendment draft Bill during President Gotabaya Rajapaksa’s tenure, the Minister noted that all provisos that were included in the previous draft Bill due to the former President’s request had now been completely removed.

Therefore, the new draft Bill will reflect the 19th Amendment to the Constitution and will go even beyond that, according to Rajapakshe.

He explained that the new draft Bill contained more features that empowered the Parliament as well as mechanisms to counter bribery and corruption. “It is, therefore, a 19th Amendment Plus scenario,” the Minister added.

The draft Bill of the 22nd Amendment that was earlier presented to Parliament was terminated following the prorogation of Parliament until Wednesday (3 August) last week.

In the previous 22nd Amendment draft Bill, former President Rajapaksa requested certain powers vested with the Executive Presidency to remain during the period of the incumbent Parliament.

Among the clauses that the provisos requested were the ones on the President’s power to appoint members to the Cabinet and ministry secretaries, the holding of Cabinet portfolios, and the President’s power to remove a prime minister.

Fitch Ratings said it was keeping a Rating Watch negative on Sri Lanka’s DFCC Bank amid a currency crisis that has triggered dollar shortages and sovereign default while there are also mounting bad loans.

The Rating Watch Negative “reflects the potential for the bank’s creditworthiness to deteriorate relative to other entities on our Sri Lankan national rating scale,” Fitch said.

“This is because of heightened stress on the bank’s funding and liquidity, and its exposure to the sovereign via investment in foreign-currency instruments that raise risks to its overall credit profile.

“We believe that the sharp rise in inflation, depreciation of the local currency, and other factors can distort the bank’s underlying financial position in the current operating environment.”

Sri Lanka is gripped by the worst currency crisis in the history of the island’s intermediate regime central bank. Sri Lanka’s economists got the ability to trigger a balance of payments deficits and currency crises with the setting up of a soft-pegged central bank in 1950.

In 2022 the rupee collapsed to 360 to the US dollar from 200 as an attempt was made to float the currency with a surrender rule.

Fitch said the bank’s foreign-currency funding and liquidity position was significantly challenged and vulnerable to sudden shocks amid weaker credit sentiment though the bank was successful in securing USD150 million of term funding in 2021, Fitch said.

“We believe further access to such funding would be difficult, similarly to peers, given the sovereign’s debilitated credit profile,” the agency said.

As customer repayment capacity weakens due to the economic conditions Fitch said, it expects DFCC’s impaired (stage 3) loan ratio to increase in the near to medium term.

” Impaired loans at end-2021 were 6.2% of total assets together with a further 2.2% of assets in US dollar-denominated sovereign bonds and Sri Lanka Development bonds, the share of which is estimated to have reduced in 1H22,” the rating agency said.

The agency said that sovereign default together with increasing economic challenges poses significant downside risks to DFCC’s profitability, to the extent that the bank may become structurally unprofitable.

“Earnings pressure is already evident in the bank’s operating profit/risk-weighted asset ratio that declined to 0.6% by end-1Q22 (end-2021: 1.7%) as credit costs eroded 83% of the bank’s pre- impairment profits”

The full statement is reproduced below:

Fitch Maintains DFCC Bank’s National Rating of ‘A+(lka)’ on Watch Negative

Fitch Ratings – Colombo – 28 Jul 2022: Fitch Ratings has maintained DFCC Bank PLC’s National Long-Term Rating of ‘A+(lka)’ on Rating Watch Negative (RWN). Fitch has also maintained DFCC’s senior and subordinated debt ratings of ‘A+(lka)’ and ‘A-(lka)’, respectively, on RWN.

KEY RATING DRIVERS

RWN Maintained: The RWN on DFCC’s National Long-Term Rating reflects the potential for the bank’s creditworthiness to deteriorate relative to other entities on our Sri Lankan national rating scale. This is because of heightened stress on the bank’s funding and liquidity, and its exposure to the sovereign via investment in foreign-currency instruments that raise risks to its overall credit profile.

We believe that the sharp rise in inflation, depreciation of the local currency, and other factors can distort the bank’s underlying financial position in the current operating environment.

Foreign Currency Liquidity Constraints: We believe DFCC’s foreign-currency funding and liquidity position is significantly challenged and vulnerable to sudden shocks amid weaker credit sentiment. The bank was successful in securing USD150 million of term funding in 2021, but we believe further access to such funding would be difficult, similarly to peers, given the sovereign’s debilitated credit profile.

Weakening Operating Environment: Our assessment of Sri Lankan banks’ operating environment (OE) reflects the pressure on the banks’ already stressed credit profile following the sovereign’s default on its foreign-currency obligations. It also captures the rapid deterioration in the broader economy, including increased interest rates, high inflation, and acute currency depreciation. The economic slump has limited DFCC’s operational flexibility.

Increasing Asset-Quality Pressure: Fitch expects DFCC’s impaired (stage 3) loans ratio to increase in the near to medium term as borrower repayment capacity weakens due to the rapidly deteriorating economic conditions. The bank’s exposure to the government’s foreign currency-denominated instruments, although small relative to peers, adds to asset-quality pressure. Impaired loans at end-2021 were 6.2% of total assets together with a further 2.2% of assets in US dollar-denominated sovereign bonds and Sri Lanka Development bonds, the share of which is estimated to have reduced in 1H22.

Capital Buffers Under Pressure: Fitch expects increased asset-quality risks, and weaker earnings retention alongside bloated risk-weighted assets from the Sri Lankan rupee’s sustained depreciation, which will exert significant pressure on the bank’s capitalisation metrics in the near term. This is despite the bank’s lower exposure to foreign currency-denominated government securities than that of peers. Capital raising continues to be a challenge for the bank, as seen in its recently concluded rights issue that was undersubscribed.

Credit Costs to Erode Earnings: We believe that sovereign default together with increasing economic challenges poses significant downside risks to DFCC’s profitability, to the extent that the bank may become structurally unprofitable. Earnings pressure is already evident in the bank’s operating profit/risk-weighted asset ratio that declined to0.6% by end-1Q22 (end-2021: 1.7%) as credit costs eroded 83% of the bank’s pre-impairment profits.

Economic Volatility Weighs on Business Model: We believe that DFCC’s business profile, like most domestic peers, is highly vulnerable to the intensifying risks in the domestic market, given the high concentration of its business profile on the weak and unstable Sri Lankan economy. This could limit the bank’s ability to generate and defend business volume. The rapidly deteriorating OE is likely to derail the bank’s aspiration of reaching LKR1 trillion asset base by 2025.

High-Risk Profile: DFCC’s elevated risk profile, similar to local peers, stems from its main exposure to high-risk customer segments with weak credit quality, as reflected in the ‘ccc’/negative OE.

This is further exacerbated by DFCC’s exposure to the government’s foreign currency-denominated instruments, albeit lower relative to peers, making the bank vulnerable to the sovereign’s repayment capacity and liquidity position.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The RWN reflects rising risks to the bank’s rating from funding stresses, which could lead to a multiple-notch downgrade. We expect to resolve the RWN when the impact on the issuer’s credit profile becomes more apparent, which may take more than six months.

Developments that could lead to a multiple-notch downgrade include:

– funding stress that impedes DFCC’s repayment ability;

– significant banking-sector intervention by authorities that constrains the bank’s ability to service its obligations;

– a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation;

– Fitch’s belief is that DFCC has entered into a grace or cure period following non-payment of a material financial obligation.

A downgrade of the sovereign’s Long-Term Local-Currency Issuer Default Rating (CCC)could also lead to a downgrade of the bank’s rating.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

There is limited scope for upward rating action given the RWN

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

SENIOR DEBT

DFCC’s outstanding senior unsecured debentures are rated at the same level as its National Long-Term Rating under Fitch’s criteria. This is because the debt ranks equally with the claims of the bank’s other senior unsecured creditors.

SUBORDINATED DEBT

DFCC’s Basel II- and Basel III-compliant Sri Lankan rupee subordinated debt is rated two notches below the National Long-Term Rating anchor. This reflects Fitch’s baseline notching for loss severity for this type of debt and our expectations of poor recoveries.

There is no additional notching for non-performance risks, as the notes do not incorporate going-concern loss-absorption features.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The senior and subordinated debt ratings will move in tandem with the bank’s National Long-Term Rating.

Source: Economy Next