Fitch Ratings said it was upgrading Sri Lanka’s foreign currency rating out of restricted default (RD) status, to CCC+ after 98 percent of bondholders accepted an offer to restructure defaulted bonds with new securities issued on December 20.
“The upgrade of the Long-Term Foreign-Currency IDR (issuer default rating) reflects Fitch’s assessment that Sri Lanka has normalised relations with a majority of creditors, after the announcement of final results of the invitation to exchange the outstanding stock of international sovereign bonds…” the rating agency said.
“One bond series with non-aggregated collective action clauses did not meet the required 75 percent level.
“Without this bond series, the acceptance results imply a restructuring of 96% of total commercial external debt.”
The series that did not meet the threshold was a 2022 bond where Hamilton Reserve, a holdout investor, held about 25 percent of the outstanding.
The investor went to court using an older collective action clause, where there was no requirement to hold a 25 percent stake in all issued bonds.
Sri Lanka has made strong progress under an International Monetary Fund program under broadly deflationary policy operated by the central bank which started showing up in the balance of payments from September 2022.
However, analysts have warned that inflationary policy is starting to target mid-corridor (single policy rates) which is likely to have the same consequences as earlier when rates were cut with printed money.
Sri Lanka’s government debt to ratio would fall to about 90 percent of GDP by 2028. Interest to revenue cover would be 42 percent, which was above the 16 percent of ‘CCC’ rated countries. It would still be a fall from 67 percent before default.
Countries that have inconsistent monetary regimes (soft-pegs or flexible exchange rate where the operating framework results in high inflation and repeated currency cum stabilization crises) tend to have high nominal interest rates, analysts have warned.
The UK, which probably had the greatest currency since the Roman Solidus, saw interest rates on long bonds rise close to 20 percent in the late 1970s after repeated ‘Sterling crises’ and IMF programs under aggressive Sri Lanka style macro-economic policy, with severe anchor-conflicts, analysts say.