Favourable times, but Lanka yet to decide on bond issue

With robust inflows expected this year, the Central Bank says the government has not decided whether or not to go for another sovereign bond issue with the situation in international capital markets favouring Sri Lanka whose credit ratings have improved while some economies in the EU facing a debt crisis have seen their ratings taking a hit.

Standard and Poor’s, Fitch and Moody’s gave Sri Lanka favourable sovereign rating reviews last year, and despite Fitch warning of financial sector risk, and Moody’s highlighted concerns about the balance of payments these agencies still seem positive about the post-conflict economy’s prospects given the ongoing fiscal consolidation and successful programme with the IMF, although a review was not completed due to differences in opinion on exchange rate management.

"We expect healthy foreign currency inflows into government coffers this year, around US$ 2.4 billion, and we have not yet decided what the structure of these inflows would be. We have several options before us and one of them is a sovereign bond issue, but we have not decided yet," Cabraal said in a brief interview with The Island Financial Review yesterday (Jan. 16).

Over the weekend, Standard and Poor’s downgraded France’s sovereign rating to AA+ from AAA, undermining its leadership role, shared with Germany which still holds its AAA rating, in taking the eurozone out of the debt crisis. Several other European economies saw their ratings downgraded as well.

Despite the 3 percent devaluation of the rupee against the dollar, the US$ 1 billion sovereign bond trading in international markets was doing well.

Finance Asia, a reputed specialised magazine in the region, paid a glowing tribute to the sovereign bond issue noting that it was performing well despite the devaluation in November.

Capping the 10-year sovereign bond issue as the ‘Best Sri Lanka Deal’ in its Achievement Awards 2011, Finance Asia said in December that the award was given for the second consecutive year to the government. "Few other contenders can stand up against the sovereign, which has continued to lead the way. The country’s recovery story clearly resonates with investors, who continue to show strong demand".

"While this is not its 10-year debut, the bond nonetheless further establishes the sovereign’s following among global investors and creates a pool of liquidity it can tap in the future, bringing it closer to its more seasoned peers, the Philippines and Indonesia," Finance Asia said.

"Its ability to raise $1 billion of cash amid volatile markets is testament to how far Sri Lanka has come since ending its civil war. It also contrasts sharply with the experience of its embattled European peers. Sri Lanka paid a competitive 6.25 percent coupon for its 10-year bond and about 40 basis points less on a spread basis than previously. Sri Lanka’s sovereign bond was also well-timed to take advantage of a ratings upgrade from Fitch to BB- from B+. While the country devalued its currency by 3 percent after the bond issue — which some said had a psychological effect on investors — it is worth pointing out that the bonds were still holding up above par in December," Finance Asia said.

"The country’s economic scale and diversity, and per capita income level, are in line with most single B-rated sovereigns.

However, a peace dividend in the form of a pick-up in economic growth, if sustained, should translate into greater credit strength. The pace and permanence of an improvement in credit fundamentals will also be determined by the success of ongoing structural and fiscal reforms," Moody’s said earlier this month.

"Structural reforms to support longer-term growth prospects combined with further fiscal consolidation efforts would increase Sri Lanka’s chances of moving further up the ratings scale," Fitch Ratings said in December.

However, both agencies were concerned about the balance of payments situation, particularly the growing current account deficit.

With the Central Bank selling dollars to keep the exchange rate stable in the face of ‘severe’ import demand, this was adding pressure on money market liquidity levels already under stress from the growing demand in credit. Domestic interest rates have been under siege for the past few weeks, as continuously reported in these pages.

Cabraal has said a significant portion of the near US$ 25 billion foreign currency inflows expected this year would come in by the first quarter of this year, easing pressure on the balance of payments.

The Treasury on the other hand, is pressuring the bank to devalue the rupee once again, and also tighten interest rates in a bid to curtail demand.

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