Foreign debt raised by the private sector firms during the last few years are now a cause for concern as servicing such debt has become a challenge for the borrowers with the rising interest rates in the United States and the depreciating Lankan rupee, a Colombo-based stockbroking house said.
According to Asia Securities Head of Research Kanishka Perera, the private sector external debt has risen to slightly above 25 percent of the country’s gross domestic product (GDP) in 2014 from a low of 10 percent in 2004.
“This is a concerning factor given the rising interest rates,” Perera said.
While the government’s foreign debt-to-GDP, which is now slightly above 30 percent and being considered as moderate risk by the World Bank and the International Monetary Fund, the private sector borrowings could also add to the country’s external woes.
According to the Central Bank, there are as much as US $ 4.5 billion foreign outflows in 2016, which include debt repayments. However, Sri Lanka’s external reserves stand just above US $ 7 billion.
Speaking at an event to launch a report titled ‘Sri Lanka in 2016: Macro & Political Outlook’ jointly compiled by Verité Research – a policy think tank on economic, political and legal issues – and Asia Securities, Perera said some of the companies in fact had been settling their dollar loans during the last few months through other means to minimize both exchange and interest rate risks. Sri Lankan banks and corporates were seen raising dollar loans from the international capital markets almost till the end of 2015 amid relatively lower dollar loan interest rates.
The last regime was using the banks as proxies to borrow overseas and kept those loans as off-balance sheet funding.
Further, the Central Bank relaxed the exchange control regulations to woo local firms to borrow overseas, allowing the banks and the corporates to borrow up to US $ 50 million and US $ 10 million, respectively, sans exchange control regulations.
In 2013, the government encouraged NDB and DFCC to raise long-term foreign development finance up to US $ 250 million each to provide long-term funding for small and medium enterprises (SMEs), plantations, construction and other manufacturing industries.
Meanwhile, Verité Research Director Dr. Nishan De Mel also observes the rising private sector foreign currency debt levels against the falling government sector foreign debt.
“Even though the government’s external debt has been coming down, private sector external debt has been going up.
So, this actually has repercussions for exchange rate management in the long run because it is not just national external debt we should look at, and this shows how the borrowing costs for bonds, etc., have been going up over time,” Dr. De Mel said, presenting the macro-political outlook for 2016.
Speaking on the moderately risky foreign borrowings by the state, which now stands at slightly above 30 percent of the GDP, he said, although the country is not in the danger zone at present, cautioned for the need to watch the situation closely.
“We should be watching that space because when it goes to 40 (percent of GDP) it’s a problem,” he added.
Sri Lanka’s total government debt-to-GDP now stands above 70 percent, much higher than the similar rated peers for which the ratio hovers around mid-40 percent.