Sri Lanka Default Declaration... No Impact on Korean Market?

by Kwon Jaehee

Published 12 Apr.2022 18:17(KST)

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] As the Central Bank of Sri Lanka declared a temporary default on the 12th (local time), concerns are rising over a potential chain of defaults among low-income countries, drawing attention to the possible impact on our market. Although the immediate effect on our market is expected to be minimal, experts predict that in the long term, it will serve as a factor increasing caution among individual countries and companies.

According to major foreign media including AFP on the 12th, Sri Lanka announced that it will temporarily suspend repayment of overseas debt amounting to $51 billion (approximately 62.9 trillion KRW) until the International Monetary Fund (IMF) provides bailout funds.

The governor of the central bank stated, "To avoid a hard default (a substantial default where private creditors suffer total losses), we are temporarily postponing external debt payments," adding, "We will use the limited foreign currency reserves to import essential items such as fuel."

While there are forecasts that the default declaration by Sri Lanka could trigger a spread of defaults originating from developing countries, the prevailing view is that the immediate impact on our market will be minimal. This is because Sri Lanka holds a negligible position in the international market and the causes of its default are attributed to overlapping crises such as the COVID-19 pandemic and the Ukraine situation.

Jo Byung-hyun, head of the investment strategy team at Daol Investment & Securities Research Center, said, "The aftermath of Sri Lanka's default will likely begin with neighboring developing countries with weak economic fundamentals," adding, "It is difficult to see it as an immediate major problem for our market, but due to the Federal Reserve's tightening pace and inflation concerns, indicators related to credit risk are moving, which will act as a factor increasing overall market caution regarding credit risk, countries, and companies."

An asset management industry official also commented, "When dividing markets, they are categorized into emerging markets and developed markets, but Sri Lanka is considered a frontier market smaller than emerging markets, so very few investments have been made there," and diagnosed, "Sri Lanka's economic structure is highly dependent on tourism, which has struggled due to the COVID-19 pandemic and was ultimately devastated by the Ukraine crisis, so the impact on the Asian economy will be limited."

Meanwhile, Sri Lanka's foreign currency reserves stood at only $1.93 billion as of the end of March.