Sri Lanka on Friday said it is looking at "alternate sources" of external financing after a sovereign rating cut this week that analysts expected would cause borrowing costs to surge even higher.
The $32 billion economy has been struggling with a series of economic woes that have been masked by recent military progress in a 25-year war with separatist rebels, including a balance of payment crisis, a fall in foreign currency reserves and slowing economic growth.
Few analysts expect Sri Lanka to face default, but say it will be forced to pay a high risk premium amid the global credit crunch, and with investor confidence hurt by the suspension of an oil hedge that could cost it hundreds of millions of dollars.
"Now the risk premium on foreign loans will be significantly high, making Sri Lanka face extremely difficult conditions in external borrowing given the global crisis," said Dhanushka Samarasinghe, head of research at Asia Securities.
It has had no success yet finding backers for a $300 million syndicated loan, and on Friday, the central bank said it was looking at alternative sources to meet its external funding needs.
"It seems like IMF is the only alternate source at the moment," said a Colombo-based analyst who, like others Reuters talked to, spoke only on condition of anonymity.
High interest rates, slowing foreign currency inflows, high government expenditure led by war and an oversized public sector have caused the government to increasingly seek costly foreign short-term loans and impose high import taxes.
And though it had good relations with banks, foreign investors began to question its commitment to honouring international contracts after the supreme court on Nov. 28 halted payments to five banks involved in an oil hedge.
"Nobody will come forward to lend money in such a risk environment," said a Hong Kong-based bank analyst on condition of anonymity. "Sri Lanka's planned $2 billion foreign borrowing in 2009 will be at a risk with more than 1 percent risk premium."
The government stands to lose hundreds of millions of dollars after oil fell around 70 percent off of its peak of $147 a barrel in July, as the government had bet it would go over $200. Opposition politicians and businessmen sued to stop the deal.
U.S. Ambassador Robert Blake was critical of the decision.
"To levy barriers against imports or to creep away from, if not outright abandon, international agreements that help facilitate the flow of goods and services would be shortsighted and ill-advised," he said last week.
Rating agencies said the oil case would not have a direct impact on future ratings.
"The addition of legal uncertainty to an already stretched repayment capacity will give Sri Lanka's creditors another reason to be rightfully concerned," said an international sovereign ratings analyst, whose agency rates Sri Lanka.
But a widely popular war effort against the Tamil Tiger rebels could help propel President Mahinda Rajapksa's government to another term, allowing him to sidestep opposition criticism of his administration's handling of the economy.
"The majority will favour the war at the moment. So the government is in a strong position if it goes for an (early) election," said Geeth Balasuriya, assistant research manager at HNB Stockbrokers.
reuters
The $32 billion economy has been struggling with a series of economic woes that have been masked by recent military progress in a 25-year war with separatist rebels, including a balance of payment crisis, a fall in foreign currency reserves and slowing economic growth.
Few analysts expect Sri Lanka to face default, but say it will be forced to pay a high risk premium amid the global credit crunch, and with investor confidence hurt by the suspension of an oil hedge that could cost it hundreds of millions of dollars.
"Now the risk premium on foreign loans will be significantly high, making Sri Lanka face extremely difficult conditions in external borrowing given the global crisis," said Dhanushka Samarasinghe, head of research at Asia Securities.
It has had no success yet finding backers for a $300 million syndicated loan, and on Friday, the central bank said it was looking at alternative sources to meet its external funding needs.
"It seems like IMF is the only alternate source at the moment," said a Colombo-based analyst who, like others Reuters talked to, spoke only on condition of anonymity.
High interest rates, slowing foreign currency inflows, high government expenditure led by war and an oversized public sector have caused the government to increasingly seek costly foreign short-term loans and impose high import taxes.
And though it had good relations with banks, foreign investors began to question its commitment to honouring international contracts after the supreme court on Nov. 28 halted payments to five banks involved in an oil hedge.
"Nobody will come forward to lend money in such a risk environment," said a Hong Kong-based bank analyst on condition of anonymity. "Sri Lanka's planned $2 billion foreign borrowing in 2009 will be at a risk with more than 1 percent risk premium."
The government stands to lose hundreds of millions of dollars after oil fell around 70 percent off of its peak of $147 a barrel in July, as the government had bet it would go over $200. Opposition politicians and businessmen sued to stop the deal.
U.S. Ambassador Robert Blake was critical of the decision.
"To levy barriers against imports or to creep away from, if not outright abandon, international agreements that help facilitate the flow of goods and services would be shortsighted and ill-advised," he said last week.
Rating agencies said the oil case would not have a direct impact on future ratings.
"The addition of legal uncertainty to an already stretched repayment capacity will give Sri Lanka's creditors another reason to be rightfully concerned," said an international sovereign ratings analyst, whose agency rates Sri Lanka.
But a widely popular war effort against the Tamil Tiger rebels could help propel President Mahinda Rajapksa's government to another term, allowing him to sidestep opposition criticism of his administration's handling of the economy.
"The majority will favour the war at the moment. So the government is in a strong position if it goes for an (early) election," said Geeth Balasuriya, assistant research manager at HNB Stockbrokers.
reuters
