No material impact of Lanka crisis on CRISIL-rated entities

April 18, 2022 location

Mumbai

The ongoing economic crisis in Sri Lanka, leading to the announcement of sovereign default on all external debt, is unlikely to have a material impact on the credit profiles of CRISIL-rated companies with operations there. That’s primarily because of minimal trade and low contribution to revenue from the operations in the island nation.

The crisis in Sri Lanka intensified after the Covid-19 pandemic began, which badly affected tourism, one of the mainstays of the economy. Then in April 2021, a sudden ban on the use of chemical fertilisers (subsequently lifted) led to food shortages. The Sri Lankan rupee, which was valued at 195 per US dollar then, depreciated sharply and currently hovers around 325 per dollar. To boot, the country has perilously low forex reserves.

For the 11 months ended fiscal 2022, India’s exports to, and imports from, Sri Lanka totaled $5.9 billion, or just 0.64% of India’s total trade. Exports to Sri Lanka, at ~$5 billion, account for 1.3% of India’s total exports. These levels have remained rangebound in the past three fiscals.

Of the top 50 countries with which India trades, Sri Lanka is ranked 38 or 39 in past three fiscals 2020-2022. Coffee, tea, sugar, cotton, cereals, edible fruits and nuts, rubber, animal, vegetable fats, paper pulp and other agro-products account for ~30% of the total trade (both imports and exports) with Sri Lanka.

Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “Given the substitutable nature of products traded in, and the limited share in overall trade, the current crisis is unlikely to have any major impact on CRISIL-rated companies. A few companies in the auto and FMCG sectors could see some impact due to their modest Sri Lankan operations. Also, there could be some impact on shipping companies that depend on feeder cargo activity. On the other hand, orthodox tea and ready-made garment exporters could see some benefit from improved demand, or higher realisation, as supplies from Sri Lanka dwindle.”

Colombo is a major transhipment hub for South Asia, including India, because of its natural locational advantage and competitive pricing. But because of fuel shortage in the country, these services could be diverted to other ports such as those in India.

Indian shipping companies, which carry cargo from smaller ports to Colombo may see some impact because of change in sea-routes of mainline operators to any other port. To replicate this shift may not be cost-effective for some shipping companies and hence the impact would vary on case-to-case basis.

Conversely, ports in India, particularly those on eastern and southern coast of India are expected to see some benefit from diversion of transshipment and other shipping activities from Colombo.

There could be some specific companies which could have large exposure to the country and hence may be impacted more. CRISIL Ratings is closely monitoring the developments and will assess the credit quality impact on case-by-case basis.

For the 11 months ended fiscal 2022, India’s exports to, and imports from, Sri Lanka totaled $5.9 billion, or just 0.64% of India’s total trade. Exports to Sri Lanka, at ~$5 billion, account for 1.3% of India’s total exports. These levels have remained rangebound in the past three fiscals.

Colombo is a major transhipment hub for South Asia, including India, because of its natural locational advantage and competitive pricing. But because of fuel shortage in the country, these services could be diverted to other ports such as those in India.

Indian shipping companies, which carry cargo from smaller ports to Colombo may see some impact because of change in sea-routes of mainline operators to any other port. To replicate this shift may not be cost-effective for some shipping companies and hence the impact would vary on case-to-case basis.

Conversely, ports in India, particularly those on eastern and southern coast of India are expected to see some benefit from diversion of transshipment and other shipping activities from Colombo.

There could be some specific companies which could have large exposure to the country and hence may be impacted more. CRISIL Ratings is closely monitoring the developments and will assess the credit quality impact on case-by-case basis.

For the 11 months ended fiscal 2022, India’s exports to, and imports from, Sri Lanka totaled $5.9 billion, or just 0.64% of India’s total trade. Exports to Sri Lanka, at ~$5 billion, account for 1.3% of India’s total exports. These levels have remained rangebound in the past three fiscals.

Colombo is a major transhipment hub for South Asia, including India, because of its natural locational advantage and competitive pricing. But because of fuel shortage in the country, these services could be diverted to other ports such as those in India.

Conversely, ports in India, particularly those on eastern and southern coast of India are expected to see some benefit from diversion of transshipment and other shipping activities from Colombo.

There could be some specific companies which could have large exposure to the country and hence may be impacted more. CRISIL Ratings is closely monitoring the developments and will assess the credit quality impact on case-by-case basis.