Asia’s Most Distressed Sovereign Debt May Force Economy ‘Reset’

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A would-be hub of Indo-Pacific commerce and global tourist gem, Sri Lanka was already struggling to deliver on grand visions before the coronavirus crisis struck the world economy. The next few months may determine its ability to avert a painful debt restructuring.

The South Asian nation is locked in talks with the International Monetary Fund for emergency-financing aid, after its second longer-term program with the fund in less than a decade expired last Tuesday. It’s shaping up as a classic battle between a political program geared toward goosing growth, and concerns about raising enough money to rein an already-massive debt load.

A sometime favorite among investors — Sri Lanka as of late 2019 had the largest overweight among JPMorgan Chase & Co. clients in Asian frontier bond markets — the country has faced down tough times in the past. And the central bank said last month it will again honor all its obligations on time.

That may depend on the policies set following upcoming parliamentary elections, a date for which may be announced Monday. Also key: the degree of forbearance from China and India, which have competed for influence in the strategically located Indian Ocean nation.

“Sri Lanka could avoid a debt restructuring, but it would need hard decisions and reset of the economy,” said Saurav Anand, economist for South Asia at Standard Chartered Bank in Mumbai. “Markets fear that given limited fiscal space, if there is a delay in resorting to corrective actions,” a renegotiation of the payment schedule will soon become inevitable.

Sri Lanka’s obligations are considerable: external debt makes up more than half of gross domestic product, and Fitch Ratings calculated some $3.2 billion of payments due between May and December this year.

The deep and sudden global recession caused by the coronavirus and moves to contain it has forced extraordinary measures by countries the world over. In Sri Lanka’s case, the added challenge is the pre-existing conditions of low growth and enormous debt.

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