Sri Lanka clinches debt agreement
Sri Lanka said on Thursday it had reached a new restructuring agreement in principle with representatives of its offshore bondholders just two days before its presidential election, after an earlier deal, announced in July, was rejected by the International Monetary Fund and other bilateral creditors.
The approval of a fourth payout under a 48-month US$2.9bn Extended Fund Facility is dependent on the IMF’s endorsement of the restructuring plan. Sri Lanka defaulted on about US$12.5bn of offshore bonds in 2022.
Sri Lanka also said on Thursday it had reached an in-principle agreement with China Development Bank, a major bilateral creditor, for approximately US$3.3bn of debt.
The result of this weekend’s election could impact how soon Sri Lanka secures its next tranche of funding from the IMF, with incumbent president Ranil Wickremesinghe seen as most likely to continue the programme on the current terms.
“His government entered the IMF agreement in the first place thus he is seen as the most likely to lead to continuity. But he is not that popular,” due to the austerity measures imposed as part of the programme, said Nicholas Yap, Asia credit analyst at Nomura.
Anura Kumara Dissanayake, known as AKD, from the National People's Power party is currently ahead in the polls, with Sajith Premadasa from the Samagi Jana Balawegaya party and Wickremesinghe close behind.
“AKD’s election rhetoric is fiery – he has said he wants to renegotiate with the IMF, but has since backtracked a little bit by saying he will not do anything to jeopardise the economy … He could ultimately prove to be more pragmatic if actually voted into office," Yap said.
Meanwhile, Premadasa has said he wants wealthy Sri Lankans to bear more of the burden of the economic reforms and would seek “fundamental changes” to the current plan.
“Unlike a couple of months ago when the campaign started off, by now all candidates have come to some kind of reality check about how much can be negotiated given how far along we are in the process and the implications for Sri Lanka’s reputation of making any significant changes,” said a Colombo-based economist.
Dimantha Mathew, chief research and strategy officer at investment bank First Capital, said the leading candidates are aware of the need to continue the IMF programme to bridge the fiscal gap. The new government is likely to present a temporary 2025 budget in November – which it will have to start working on immediately – and a detailed budget once parliamentary elections are held sometime between December and February.
“If it does not secure sufficient IMF funding, it will have to fund that gap locally, which will affect already high interest rates,” he said. Sri Lanka’s standing lending facility rate is currently at 9.25%.
"In the short to medium term, they [opposition candidates] will continue the programme but at that same time may initiate separate discussions on the possibility of changes," he said.
New restructuring plan
The election on Saturday will be Sri Lanka’s first since the South Asian country fell into economic crisis and defaulted on foreign currency debt in April 2022.
Sri Lanka has so far received about US$1bn under the IMF's bailout package, secured in March 2023, and is expecting an IMF delegation to review the programme in mid-October.
The new restructuring agreement announced last week, which received informal approval from the IMF, reworks part of the earlier July deal to include governance-linked bonds and a local option that allows bondholders to exchange part of their US dollar-denominated debt into rupee-denominated debt.
The original notes would be given a 27% nominal haircut under the new deal, compared to 28% under the July agreement.
It retains the macro-linked bonds feature from the earlier agreement, which Nomura's Yap said appeared to give a lot of upside to bondholders, but raises the GDP thresholds above which bigger payouts are triggered. The new agreement also lowers some coupons.
Sri Lanka said it expects to receive formal confirmation from the IMF that the latest proposal is consistent with its programme.
The country’s international bonds have been trading downwards in recent months, coinciding with polls showing greater support for the NPP, but were bolstered by the news of the restructuring agreement.
A US$650m 6.125% June 2025 traded at a cash price of 52.25 on September 19, before the announcement, compared to 60.125 in mid-June. A US$1.5bn 6.85% July 2026 note was trading at 52.125, compared to 60 in June, and a US$1.4bn 7.85% March 2029 was trading at 52.5, down from 60.
These rose to 53.625, 53.25 and 53.875, respectively, after the announcement.
“If ADK wins, the initial knee-jerk reaction is likely to be negative, but if he clarifies he’s not going to tear up the current agreement, then [the bonds] might not perform so badly,” said Yap.
A Wickremesinghe win is most likely to bring bond prices back to early July levels, he said.