Domestic Debt Restructuring and GFN

Everyone talks about Domestic Debt Restructuring. But no one wants to work the numbers.

"Without data,?you're?just?another person with an opinion" - Edwards Deming

I did the math, so you don’t have to.

TL;DR

? An extension of maturity needs to be done for ALL bonds, not just long-term ones.

? This is because GFNs remain elevated, especially 2029 and beyond, even after reprofiling T Bills held by CBSL.

? This is due to legacy maturities and roll-overs between 2023 to 2028.

Let me tell you about this back-of-the-envelope analysis.

Disclaimer

? These are strictly personal views based on my calculations.

? Those calculations are very simplified. Actuals might differ massively.

? Figures are based on published data as of 31.12.2022.

? GFN here focuses only on T Bills and T Bonds. It excludes

??- other domestic law instruments such as SLDBs

??- liabilities such as overdrawn balances in DST accounts, suppliers dues, etc.

? This is neither investment opinion nor advice. Do your own research before investing.

What is GFN?

Gross Financing Needs refer to the overall new borrowing requirement, plus debt maturing during the year.?

This includes financing of fiscal deficit, other financing, plus amortisation.

Why GFN matters?

As per the approved IMF program, debt restructuring should meet two separate GFN targets:

? average annual GFN below 13% (2027 - 2032)

? annual foreign currency GFN below 4.5%

This implies that annual domestic currency GFN is capped somewhere around 8.5%.

IMF GFN Projections

After restructuring (both foreign as well as a "select pool" of domestic debt), IMF expects GFNs to drop towards the program targets.

What will be restructured?

Key point to note is that the above drop in GFNs are post restructuring of domestic debt.

The only indication on what those assets are is below.

Interestingly, the IMF is silent on the meaning of “select pool of the remaining domestic debt ”.

However, Govt. recently clarified this to a certain extent.

T Bills: Only T-Bills held by the CBSL will be restructured

T Bonds: Voluntary domestic debt optimization operation without coercion?

Back-of-the-envelope Projection

I worked the numbers to arrive at GFN which includes only Govt. Securities, plus primary deficit (or surplus).

Assumptions:

? T Bills held by CBSL is restructured into a 15-year T Bond

? T Bills held by others are rolled-over, annually, at an interest rate of 20% (in 2023) and 10% thereafter.

? T Bonds are rolled-over, for a tenure of 3 years, each, at an interest rate of 22.5% (in 2023) and 7.5% thereafter.

? The 10% and 7.5% rates are as per the IMF DSA assumptions.

Interpretation of Results

GFN Gap = Estimated GFN - IMF GFN projection

A GFN Gap implies that servicing burden (due to domestic debt) is beyond what's estimated by IMF.

This implies that such debt servicing must be restructured, further, to align with IMF's target GFN levels.

As the table below shows, even after restructuring of LKR?2,598 Bn T Bills held by CBSL, significant GFN gaps remain.

Year GFN Gap?

2023E??0.3%

2024E ?-3.6%

2025E ?-4.9%

2026E??1.6%

2027E 0.0%

2028E 0.1%

2029E??6.3%

2030E??4.1%

2031E 2.3%

2032E??9.7%

2033E??5.4%

Note: The favourable GFNs in 2024 and 2025 are due to my conservative assumption that all T Bond outflows in 2023 to be rolled-over for 3 years (into 2026).

This means further restructuring is needed for T Bonds.

Which T Bonds are to be restructured?

Given that the GFN gaps are awful for 2029 and beyond, you might think that a significant extension of maturity of those T Bonds would resolve this.

Nope.

If you look closely, the contribution to these acute GFN levels are, approximately:

? 5% (of GDP) is due to T Bill roll-overs

? 8.5% to 16% (of GDP) is due to T Bond roll-overs

Both are not due to maturities falling during in 2029 - 2033. Rather, it’s due to legacy maturities and their roll-overs, falling due from 2023 to 2028.

Conclusion

This means an extension of maturity needs to be done for ALL bonds, not just long-term ones.

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