IMF programme is now more likely than not : First Capital

Analyzing the economic indicators and the forecasts, we believe there seems to be an 85% probability that Sri Lanka may consider moving into an IMF programme as soon as possible, First Capital Research says in its Mid-Year Outlook report.

First Capital Research expected that :Sri Lanka may negotiate an IMF program within 3Q2021.

Though there are rumours of negotiations, so far such a program has not materialized, but the government has obtained the Rapid Funding Facility of USD 787Mn from the IMF,” the report said.

“Considering current situation of the economy, the economic indicators seem to be slightly worse than our initial estimates (For eg: Jun-2021 Foreign Reserves dipped to USD 4bn, six months earlier than our expectations),” it said.

It further said: “With the heavy debt burden and lower foreign reserves, two out of the three rating agencies have indicated potential downgrades. Foreign Currency debt repayment for the next 12 months amounts USD 7.0Bn compared to USD 2.8Bn of reserves as at Jul 2021.”

“Though there is an improvement, the Balance of Payments is still in deficits, further deteriorating the foreign reserve position. We expect foreign reserves to fall to dangerously low levels of USD 3.5Bn by Dec 2021 and USD 3.0Bn by Jun 2022,”

“Moody’s Rating for Sri Lanka currently stands at Caa1. The Outlook was recently changed to “Under Review”. Similarly, S&P Global has a rating of CCC+ for Sri Lanka and the agency recently downgraded the Outlook to Negative.”

“Fitch, however, has affirmed the rating for Sri Lanka at CCC. Fitch does not provide “Outlook” for countries with ratings of CCC and below.”

“As Sri Lanka is in the 2nd year of 10%+ budget deficit, potentially with an IMF programme coming in there is a significant possibility for tax rates to be revised upwards.”

As the risk rises in the system supported by an increase in rates, we recommend to further reduce the equity portfolio to 50% or aggressively shift the portfolio to defensive counters.”

“Banking (mainly COMB, HNB, SAMP, NDB), selected dollar income companies (HAYC, TJL, WIND & LVEF – others have surged in price and cannot be highlighted as defensive anymore, Eg: EXPO, HAYL, MGT), dividend yielding counters (CTC, NEST, LLUB) and Life Insurance companies are the preferred defensive counters.” First Capital Research said.