Sri Lanka’s domestic debt plan a significant step for resolving bank uncertainty - Fitch

The Sri Lankan government’s proposal for treatment of domestic debt marks a significant step towards resolving uncertainties around the impact of the sovereign’s debt restructuring on the local banking sector, but complications may arise from a number of factors, says Fitch Ratings.

The Sri Lankan government’s proposal for treatment of domestic debt marks a significant step towards resolving uncertainties around the impact of the sovereign’s debt restructuring on the local banking sector, but complications may arise from a number of factors, says Fitch Ratings.

The proposal excludes banks’ holdings of Sri Lankan rupee-denominated treasury securities, which will alleviate some of the pressure on their already stressed capital positions from weakening loan quality and the rupee’s depreciation.

Although the government’s domestic debt treatment announcements go some way towards resolving uncertainties over Sri Lankan bank ratings, many risks remain. It is still unclear, for example, whether the government’s proposals have received support from the sovereign’s key external creditors. If not, the risk of further domestic debt restructuring could linger, resulting in further instability for the banking sector.