A RULING Friday by Sri Lanka's Supreme Court's to halt payments to an international bank in connection to a badly judged oil hedging deal entered into by the state-owned Ceylon Petroleum Corporation (CPC) could harm Colombo's ability to obtain credit from global markets, an international rating agency warns.
The CPC had entered into a hedging deal on the assumption oil prices would not fall and was now obliged to buy 200,000 barrels of oil per month for 12 months at $100, even though the market price is now almost half that. Chanaka Wickramasuriya, Head of Fitch Rating Lanka, told local media that there is a real possibility of premiums going up or credit lines drying up for Sri Lankan state agencies, particularly CPC, which depends heavily on credit from global markets.
Wickramasuriya further added that whilst the halt in payments imposed by the Supreme Court would not be construed as sovereign default per se, creditors would be forced to think twice prior to lending any money to or entering into a transaction with a Sri Lanka state agency, as the ruling raises doubts over the reliability of such financial transactions.
The interim ruling by the Supreme Court on the Fundamental Rights petition filed by Sri Lankan civil society group Corruption Watch might damage Sri Lanka's credibility in international financial markets, analysts say. "Future agreements with any party are at risk and will have serious financial repercussions with possible increase of risk premium," Reuters quoted unnamed analysts as saying. "This might make it very difficult for Sri Lanka to borrow commercial loans in future as investors will be concerned over borrowings as well."
In addition to suspending the remittance of any payments to Standard and Chartered Bank, the Supreme Court Chief Justice on Friday recommended the President take over the functions of the Minister of Petroleum, A.H.M. Fowzie, until a suitable minister is appointed. The ruling effectively suspends the minister and orders the functions of the CPC chairman, Ashantha de Mell, be suspended immediately.
Meanwhile, a Colombo stock market source speaking on the grounds of anonymity told the Sunday Leader newspaper that even before Friday's interim injunction foreigners were pulling out of the bourse.
"This [SC ruling] would only make it worse," the source was quoted as saying. According to the paper, all
was well and good when the CPC was saving money, but now the problem has arisen because the government is losing money.
According to the hedging deal with Citi Bank, Standard Chartered Bank, Deutsche Bank and two local banks, the Sri Lankan state, through CPC, committed to purchase 100,000 barrels of oil per month for three months at $140 per barrel cap and 200,000 barrels of oil per month for 12 months at $100 per barrel floor.
This meant if oil prices went above $140 per barrel, CPC would still be able to buy oil at $140 per barrel with the banks taking the loss. It also meant, even if the oil price dropped below $100, CPC will have to pay a $100 per barrel, taking the loss.
Oil prices have fallen sharply in recent months, to around $50 per barrel. Hedging analysts say Sri Lanka would have to pay at least $300 million during the next seven months if global oil prices remained at current levels.
