Standard Chartered sees high probability of Sri Lanka getting a principal haircut of less than 20% for the GDP linked bonds as the nominal GDP is expected to grow.

Accordingly, Standard Chartered expects gradual and modest rupee depreciation versus the US Dollar, projecting the US Dollar ($) to be at Rs. 390 as of end-2027. 

As a result, the GDP projection of 2024 GDP is expected to be in the $ 89-91 billion range and nominal GDP above $ 96 billion as of end-2027. 

“We therefore assign a high 75% probability of average 2025-27 nominal GDP being above $ 92 billion," Standard Chartered said.

The average 2025-27 nominal GDP threshold is specified as US Dollar 88.6 billion (IMF forecast) and the upward adjustment on repayments kick in if average nominal GDP crosses the thresholds of $ 92 billion, $ 96 billion and $ 100 billion.

The proposal agreed by the Joint Working Committee last week states that if the average nominal GDP exceeds $ 92 billion, then the principal haircut on the bonds would be at 20% and at $ 96 billion it would be 15%.

Moreover, Standard Chartered estimates probability-adjusted recovery values in the range of 57-71 at exit yields of 9%-13% while they expect base case to see a probability-adjusted recovery value of 64 at an exit yield of 11%

Further, they expect a real cumulative GDP growth from 2024-27 with real GDP growth at 3% in 2024 and at 3.5-4.0% over 2025-27 if the reform measures continue, which brings us to cumulative real GDP growth of 14% over 2024-27. 

“Accordingly, we assign a 80% probability that cumulative GDP growth will exceed the baseline of 11.1%,” Standard Chartered said.