Foreigners return to bond market; records first inflow for new year

The rupee bond market recorded a positive start to the New Year as foreigners bought Rs.1.5 billion or US$ 8.32 million worth government bonds during the week ended January 9, but the stock market witnessed an outflow of foreign funds worth Rs.19 million, latest data showed. 

Sri Lanka’s rupee bonds showed a continuous erosion of foreign holdings during 2019 as Central Bank slashed rates and sentiments soured on the progress on the country’s economy.
Almost a month into the new administration led by President Gotabaya Rajapaksa, Sri Lanka’s bond market suffered its largest outflow of foreign funds of Rs.8.18 billion in nearly four months in the week ended on December 11. 

However, the reversal could be an indication of the growing confidence in the new administration’s economic policy, as it was during the week ended January 9 the President presented his new economic policy.

Titled ‘National Policy Framework: Vistas of Prosperity and Splendour,’ the policy framework is a comprehensive document with timelines. Some of the policy proposals such as the economic concession package, which encompasses tax concessions, loan moratoriums, easing of regulations and reforming the unproductive State sector are already underway. 

As per the latest data, foreigners in total hold Rs.105.5 billion worth Treasury bills and bonds, up from Rs.104.02 billion last year. 

Sri Lanka a year ago halved the foreign holding limit in rupee bonds to 5 percent to prevent hot money flows and improve the quality of its reserves. 

However, at the current level of outstanding foreign holdings in rupee bonds, foreigners only have 1.8 percent of the total outstanding stock of government securities. 

As Sri Lanka is keen to attract foreign investments, the economic planners of the new administration are likely to give the foreigners more room to park their money in Sri Lankan bonds. 

Meanwhile, Sri Lanka ended 2019 with foreign reserves of US$ 7, 638.5 million, higher than US$ 6, 936.35 million a year ago.  This is adequate to cover 4-5 months of imports.