First Capital maintains domestic debt restructuring probability low at 20-pct

First Capital maintains the domestic debt restructuring (DDR) probability at 20%, highlighting that the domestic debt restructuring probabilities stand low for Sri Lanka.

Following are the arguments for and against presented by First Capital in terms of DDR.

Arguments Against Local Debt Restructuring

Rupee investors equivalent to having suffered
debt restructuring:
With the steep depreciation
and high inflation faced by local investors, buying
power of the local currency investors have almost
halved resulting in a major set back. In such a
situation it is unfair to again consider
restructuring of local debt.

Requirement to recapitalize selected banks:
Restructuring of domestic debt may cause a
detrimental impact to the financial institutions
Banks, Finance Companies, Insurance companies
and Pension Funds such as EPF which have
invested a large portion of their assets in
domestic debt and also are struggling amidst the
ailing economic conditions. It is likely to cause a
significant erosion in capital resulting in a Govt
requirement to support to recapitalize some of
the financial institutions which may again be a
burden to the budget deficit.

Ghana struggles to finalize DDR: 3 months after announcing domestic debt restructuring Ghana still struggles to implement DDR amidst the major impact to its financial system. The latest amendment to DDR illustrates insufficient impact total debt NPV but a severe impact to the financial system continues to be present.

Arguments for Local Debt Restructuring

Debt Sustainability and Gross Financing Needs: SL’s debt to GDP is above 120% and Gross financing need to be at 25% while IMF expects both indicators to be at 100% and 15% over the medium term. With China maintaining a tough stance there is a possibility that external debt restructuring may not be sufficient to achieve the expected target, which may lead to domestic debt restructuring.

Domestic Debt Restructuring options

Hair Cut on principle: The capital returned at the end of the period is
reduced. The move is expected to reduce the
overall debt stock.

Hair Cut on Coupon: Adjusting the interest rates to be paid or coupon rates commonly known as coupon adjustment.

Increase in the maturity period: Extending the repayment or maturity period

Hybrid of above options: A Mix of some or all of the above

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