July 13 (Bloomberg) – Investors are shifting their focus to Sri Lanka’s bilateral creditors as the resignations of President Gotabaya Rajapaksa and Prime Minister Ranil Wickremesinghe dim prospects for rapid aid from the International Monetary Fund.
Global asset managers predict delays in loan disbursements, with Citigroup Inc. economists forecasting payouts not before early 2023. The concern is that the new administration may cancel Sri Lanka’s existing contracts with legal and financial advisers, setting back the debt negotiations even further, according to people with knowledge of the matter, who asked to stay unidentified as the situation is fluid and changing. Central bank governor Nandalal Weerasinghe is now the most senior policymaker still in his post.
“The IMF will need a constitutionally mandated government to negotiate with,” said Matthew Vogel, London-based portfolio manager and head of sovereign research at FIM Partners. “The role of the central bank governor now is key and the international community, facing a humanitarian crisis, will have to consider additional emergency aid.”
Sri Lanka’s dollar bonds sank to a record low below 30 cents on the dollar on Monday after news on the resignation of top leaders. Notes due 2030 were indicated at 26.8 cents on the dollar on Tuesday, according to Bloomberg data.
Global funds hold about $12.6 billion of Sri Lanka’s foreign-currency debt with roughly an equivalent amount held by bilateral creditors. Here’s the state of play:
The IMF is monitoring the situation and hopes for a resolution that will allow talks to resume, its mission chiefs for Sri Lanka said in a statement Sunday after mass public protests roiled the island and forced the president and prime minister to announce their intention to resign.
Meanwhile, the multilateral lender plans to continue technical negotiations with the Central Bank of Sri Lanka and Finance Ministry bureaucrats. The nation’s central bank governor and treasury secretary didn’t reply to requests for comment.
The IMF is awaiting a proposal from Sri Lanka on whittling down existing debt. This key submission, once approved by the IMF, will then have to be taken to bondholders and will form the basis for restructuring talks.
“We’ll have to wait until they form a new government, a new cabinet, and a new finance minister,” said Carlos de Sousa, a Zurich-based money manager at Vontobel Asset Management. “On one hand, it delays everything a little bit. But on the other hand, a new government could improve social stability now that those blamed for the disaster are finally leaving power.”
A representative for Rothschild & Co., financial adviser to a group comprising key creditors including BlackRock Inc. and Neuberger Berman, declined to comment. The group’s legal adviser, White & Case, declined to comment.
The risk is that a new administration could cancel contracts with Lazard and Clifford Chance, firms that outgoing President Rajapaksa’s government had signed on as financial and legal advisers, respectively. That would mean further delays until new tenders are issued and winners identified. A representative for Clifford Chance declined to comment about a client, and Lazard declined to comment.
Hamilton Reserve Bank Ltd., which has sued Sri Lanka in a New York federal court, didn’t respond to a request for comment.
India, China, Japan
China and Japan both account for roughly 10% each of Sri Lanka’s non-rupee debt, though outgoing Prime Minister Wickremesinghe has said interest rates on the Chinese loans are much higher.
India and Japan are pushing the IMF to treat China on par with other creditors. China, on its part, is concerned that its repayments could be delayed if lumped with other debt holders, Sri Lankan officials have previously said.
“China is closely following the latest developments in Sri Lanka,” Chinese Foreign Ministry spokesman Wang Wenbin told reporters during a regular press briefing in Beijing Monday.
India is now seeking payment in advance for supply of fuel to Sri Lanka after credit lines were exhausted, people with knowledge of the matter told Bloomberg last week. Sri Lanka’s neighbor has provided about $3.8 billion in assistance this year.
“The conversations with India, China are going to be at the level of the debt restructuring,” Shanta Devarajan, an economic adviser to the Sri Lankan government, told Bloomberg Television Tuesday. “There are discussions with Japan about the possibility of bridge financing and possibly with China as well.”
Sri Lanka’s immediate hope is help from the World Food Program, whose director is due to visit the island this week. The choice of a presidential candidate who holds the trust of citizens and can win support from the international community is also a vital requirement.
“The severity of the crisis, largely wrought by the President and his government, requires a level of governance not seen in Sri Lanka in years,” FIM’s Vogel said. “Whoever enters now will have a lot of goodwill, but there could be many twists and turns left.”