The Sri Lankan government’s approach for handling domestic debt is a substantial step toward settling concerns about how the restructuring of the sovereign’s debt will affect the local banking industry, but complications could still occur for a number of reasons, according to Fitch Ratings.
The proposal exempts banks from holding treasury securities denominated in Sri Lankan rupees, which will lessen the strain on their already strained capital positions caused by declining loan quality and rupee depreciation.
Fitch’s base case anticipated that banks’ holdings of treasury bonds, rather than the treasury bills they hold, would be susceptible to restructuring. As we had anticipated, bank holdings of Sri Lanka Development Bonds (SLDBs), which are denominated in foreign currency but subject to local law, will be impacted, and we continue to foresee an impact on international sovereign bonds (ISBs).
These, however, make up a far smaller portion of banks’ total assets—only 5.5%—than treasury securities, which make up 26.4% of domestic banks with a Fitch rating. Without specific measures, the proposal also calls for restructuring the government’s foreign-currency bank loans, which make up less than 1% of all assets held by Fitch-rated banks.
