ECONOMYNEXT – Sri Lanka authorities and advisors have to discuss with private creditors to decide on any proposal involving restructuring bonds linked to gross domestic product, International Monetary Fund’s Director for Asia Pacific Krishna Srinivasan said.
“We don’t get involved in these debt restructuring efforts between creditors and the debtor. So, if private creditors have put forward a proposal which includes GDP-linked bonds, that’s for Sri Lankan authorities and their advisors to engage with them to see,” Srinivasan told reporters in Morocco.
“Our role comes in in terms of to see how any kind of agreement is consistent with the debt targets and consistent debt restructuring exercise in the macro framework.”
Sri Lanka bond holders have proposed bonds whose coupons and value are linked to the “evolution of dollar GDP”.
Disputes over GDP projects in IMF debt sustainability analyses have been a sticking point between creditors and defaulting borrowers.
The bonds hope to overcome two sticking points: GDP projections and exchange rate projections.
A lower economic growth projection, which private creditors believe to be ‘pessimistic’ will squeeze the nominal gross financing foreign debt service eye-of-the-needle in 2027-32 forcing private creditors to take haircuts which may differ from the actual GDP turnout.
Under the plan proposed by bondholders, interest rates on restructured bonds will fall to 3.5 percent with a 20 percent haircut if projected GDP falls below 86.1 billion US dollars by 2028-2032.
The bonds will start with a coupon of up to 9.5 percent.
A Sri Lanka government official said the proposal which was made to the country’s advisors Lazard, was being assessed.
The proposal goes beyond earlier so-called ‘state-contingent’ bonds issued to private creditors involving value recovery instruments (VRIs) which were warrants, usually bought by hedge funds.
Sri Lanka’s private bondholder are seeking actual bonds which are index eligible and can be held by ‘real money’ investors.
There are also some small pay in kind (PIK) bonds issued as interest coupons which may be smaller than ‘sovereign size’ in the proposal.
A dollar GDP will also avoid differences between implied future exchange rates in GDP and actual exchange rates.
The year end implied exchange rate in IMF projections for 2023 is 396 to the US dollar, but the interbank exchange rate in October is about 323.50 to the US dollar.
The exchange rate for 2028, when the variables in the GDP or macro-linked bonds (MLBs) as Sri Lanka’s private creditors have labelled them, kicks the exchange rate implied in the IMF statistical model is 441 to the US dollar.
Maintaining a stable exchange with strong currency (external anchoring) is the simplest monetary regime in the world outside of outright dollarization to give stability for investors and individuals.
However, countries that print money to target potential output (cutting rates with inflationary open market operations) or for any other reason, run into forex shortages and balance of payments troubles.
Central banks in defaulting or unstable usually print money to re-finance private credit, either through actual funds (like Zimbabwe or Pakistan) or through sterilizing forex sales to maintain a fixed policy rate when domestic credit picks up.
Central banks lost the ability to maintain a fixed exchange rates wholesale, or a domestic specie anchor at zero, triggering economic crises and defaults in peacetime, with the emergence of a bureaucratically decided fixed policy rate from the 1920s, according to some analysts (Sri Lanka, world’s poor suffers from Fed’s accidental discovery).
Countries with forex shortages and rapidly weakening exchange rates have social unrest, political unrest, poverty and sometimes civil wars and military take-overs. (Colombo/Oct15/2023)
