September, 17, 2020
Financing pressures will persist for lowest-rated sovereigns with large external debt repayments
Over the remainder of 2020, external pressures – which for many non-investment grade sovereigns were already significant prior to the current economic shock – will increase for some governments with large dollar-denominated debt repayments, Moody's Investors Service said on Monday(14).
“Weaker reserve adequacy will constrain the central banks' monetary policy flexibility. It could also spark greater local currency depreciation, raising the cost of imports and increasing governments' fiscal risks, given high levels of foreign-currency debt. Such credit pressures are likely to be largest for Sri Lanka (B2 review for downgrade), Turkey (B2 negative) and Ukraine (B3 stable),” Moody’s pointed out in its report titled “Sovereigns – Global: Global risk appetite recovery supports emerging market funding; liquidity strains to persist for lowest-rated sovereigns."
“Sri Lanka has $1.0 billion in international bonds to repay in October. The government has secured $1.2 billion in external financing from China Development Bank (A1 stable), along with a $400 million swap line from the Reserve Bank of India, both of which bolster foreign exchange reserves. Nevertheless, weaker dollar inflows from subdued tourism and textile receipts are likely to keep reserves low through the remainder of 2020,” it said.
“For these sovereigns, external debt repayments through the entirety of 2020 are double our projections for year-end foreign exchange reserves. On top of these external pressures, these governments' debt burdens are most sensitive to further local currency depreciation, as around half of outstanding government debt is denominated in foreign currency. Further currency depreciation raises the local currency cost of servicing external debt,” it added.