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Sri Lanka, Oh Come On
We were more "comfortable" with Sri Lankan dollar spreads before the new year - but now they've tightened another 500bp in the big Q1 high-stress rally. Are things overdone?
As before, the good news is that near-term funding gaps are mostly closed and the government is holding the line on macro discipline.
The bad news, though, is that this equilibrium can only be maintained via painful domestic depression and a complete debt service moratorium, and there's no change in the underlying structural imbalances that brought Sri Lanka to this point.
As a result, we do believe dollar debt markets are overpriced at this point, with plenty of potential downside exposure to budget and external slippages in 2024-25. And we continue to be cautious on equity and local rates exposure as well.
Sri Lanka, Oh Come On (PDF)
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