On Thursday, May 19, the governor of Sri Lanka's central bank publicly stated that Sri Lanka had defaulted on sovereign debt.
It was Sri Lanka's first sovereign debt default since independence from Britain in 1948, and the country's bonds performed at the bottom of the world this year, with holders losing nearly 60 percent.
Sri Lanka's central bank also warned on Thursday that the country's overall inflation rate could reach 40 percent in the coming months.
The country's dollar reserves are now almost depleted, and the new prime minister has previously said that even for a day's fuel bill, there is currently no foreign exchange to pay.
01 The first emerging-market country to thunderstorm
Located on the south coast of India, Sri Lanka is an economy with a GDP of $81 billion. The island nation is in the midst of the worst recession in its independence history due to high inflation of 30 percent, a sharp currency depreciation, and an economic crisis that has left the country short of dollar hard currency for importing food and fuel.
Since the outbreak of terrorist attacks in Sri Lanka in April 2019, the country's tourism revenues have begun to decline, and the outbreak of the epidemic has made it worse, while the soaring energy prices brought about by the Russian-Ukrainian crisis this year and the simultaneous sharp rise in the US dollar and US Treasury yields have directly knocked Sri Lanka down, becoming the first emerging market country to thunder.
The country said in April that it would temporarily halt all external debt servicing due to dwindling foreign exchange reserves due to a crisis in the balance of payments.
During this time, Sri Lanka's fuel, food and medicine shortages, blackouts for hours a day, gasoline and diesel need to be queued up to buy, shortages have led to soaring inflation and sparked social unrest and political unrest, with massive protests against the government erupting on a sustained basis.
The central banker threatened to resign if politics did not return to stability as soon as possible.
02 Prime Minister: I can't afford to pay for a day's fuel
Sri Lanka does not have a fully functioning government after President Gotabaya Rajapaksa's cabinet resigned last week.
Prime Minister Ranil Wickremesinghe, appointed last week, has yet to elect a finance minister, who will help lead talks with the International Monetary Fund on much-needed aid. At the same time, the country needs to work with blackRock Inc. Negotiated restructuring with creditors, including Ashmore Group.
The prime minister, who has been in office for less than a week, warned on Monday that the country's gasoline supply would last only the last day because it would not even have enough dollars to pay for the fuel costs of tanker shipments. He also said it would be necessary to print money to pay government wages — a move that would only exacerbate already worsening inflation.
"We have a petrol boat in our waters," Sri Lanka's energy minister, Kanchana Wijesekera, said in parliament on Wednesday. "But we don't have foreign exchange."
03 Gold may be a last resort to obtain the dollar
Chirag Sheth, an adviser to London-based consultancy Metals Focus Ltd, said Sri Lankans could see a 20 per cent increase in gold sales this year compared to last year as people in dire straits sell jewellery to raise money.
He said citizens had already sold about 7 tonnes of gold in 2021. Demand for precious metals in the country has fallen by a third compared to previous years of the pandemic as tourism has taken a hit.
While gold sales are "very strong," it turns out that the precious metal is also a last resort for those who have the money to stash their money, because for Sri Lankans, Sheth said:
"You can't put your money in the stock market, bank interest rates are low, and the local currency is depreciating wildly."
04 The country's government bond investors have suffered huge losses
With a default on external debt looming, sri Lankan government bonds are already trading at a deep predicament, with holders facing losses approaching 60% of their face value.
The country's dollar bonds were among the worst performing bonds in the world this year. On April 18, the government failed to transfer about $78 million in coupons to holders of bonds maturing 2023 and 2028, leading S&P Global Ratings to declare the country in selective default.
The grace period for those payments ends today, and negotiations with creditors can officially begin, which will be key to winning the IMF's bailout. The country has previously said it needs $3 billion to $4 billion this year to get out of the crisis.
The country's $1 billion bond, which matures in July, rose 0.24 cents to 42.73 cents on Wednesday, near a record low of 42.5 cents set last week, according to Bloomberg data.
But reaching an agreement quickly is not an easy task.
05 Sri Lanka is just the beginning?
Guido Chamorro, co-head of emerging market hard currency debt at Pictet, an asset manager holding Sri Lankan bonds, said:
"The Sri Lanka default does not bode well for emerging markets and we expect the good times to end. Slower growth and more difficult financing conditions will increase the risk of default, especially for marginal countries. ”
As Sri Lanka struggles with instability, the country's problems are a wake-up call for other emerging markets, where a heavy debt burden is intertwined with economic problems and social unrest. The challenge has become more difficult as the Fed and other major central banks have raised interest rates to quell inflation, causing borrowing costs to rise.
Trang Nguyen, executive director of emerging markets strategy at JPMorgan Chase & Co., said: "In a tight financial environment, they are now forced to face the debt burden. ”
A Bloomberg indicator shows that bond yields in at least 14 developing economies are 1,000 basis points higher than U.S. Treasuries, a threshold for bonds to be considered troubled.
Sri Lanka may just be the beginning. Additional pressures from rising food and energy prices have begun to emerge in other countries such as Egypt, Tunisia and Peru. This has the potential to evolve into a broader debt collapse and pose yet another threat to the fragile recovery of the world economy from the pandemic.
06 A new round of harvesting is coming? Overseas hedge funds "coveted"
An article in early January mentioned that hedge fund managers who made a lot of money in Ecuador's bond restructuring are now eyeing Sri Lanka.
At the time, Carlos de Sousa, who ran a $3.8 billion emerging market debt fund at Vontobel Asset Management, believed the small South Asian nation would be insolvent by the middle of the year. At that time, the massive sell-off triggered by the default will cause the price of the country's treasury bonds to plummet, and the market price may even be lower than the default recovery price, giving professional investors the opportunity to profit from these oversold bonds.
de Sousa means:
"The bonds are so cheap (after default) that the recovery value is higher than the market price."
According to Bloomberg, the Vontobel Emerging Markets Debt Fund, which is mainly operated by de Sousa and Luc D'Hooge, has previously performed well. Over the past five years, the fund has beaten about 93 percent of its peers; over the past year, it has outperformed 84 percent of its competitors.
De Sousa says one of the keys to his success over the past year has been a successful bet on a rebound in Ecuadorian bonds ahead of Ecuador's presidential election last April.
In addition, the successful rebound in successful bets on Colombian and Angolan bonds also made de Sousa a lot of money.
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A new round of harvesting is coming?
