COLOMBO, Jul 5 (NNN-XINHUA) – Fitch Ratings, yesterday said, the Sri Lankan government’s domestic debt restructuring proposal was a significant step in resolving uncertainties in its banking sector.
However, complications may arise from a number of factors, Fitch Ratings said in a statement.
Fitch said that, the proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will alleviate some of the pressure on their already stressed capital positions, from weakening loan quality and the rupee’s depreciation.
Fitch said that, bank holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected.
“We still expect an impact on international sovereign bonds (ISBs) as well. However, these together account for only about 5.5 percent of banks’ combined assets, a much smaller share than treasury securities (26.4 percent for Fitch-rated domestic banks),” the statement said.
Fitch Ratings added that, the government has given three options for those holding SLDBs and that they expect banks, in general, will opt for the choice involving conversion of such debt into local currency-denominated instruments.
However, worsening impaired loans, in line with the economic stress associated with the sovereign default and the unwinding of forbearance provided during the COVID-19 pandemic are already exerting pressure on banks’ thin capital buffers, it said.
“We do not believe a restructuring of the sovereign’s local-currency obligations is likely to trigger a loss of depositor confidence in the banking system. However, funding stress remains a negative sensitivity for bank ratings,” Fitch said.
Sri Lanka’s parliament passed the domestic debt restructuring plan on Saturday, which has already had a positive impact on the country’s stock market.– NNN-XINHUA
