Fitch warns of high risk that Sri Lanka may default on 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. 

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

President Ranil Wickremesinghe in August said the government was looking at including local bonds in the debt restructuring. Fitch warned that “a default on local-currency debt could have adverse effects on Sri Lanka’s banking sector that would erode the net benefits of such a restructuring.” 

Imposing a debt restructuring on local currency debt could also prove challenging as the rating company views public support for the government as “weak,” and anticipates risks to reforms from political instability.