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SL’s planned sovereign bonds may come at a hefty risk premium: economists

4 April 2016 09:46 am - 0     - {{hitsCtrl.values.hits}}

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Sri Lanka could end up paying an additional risk premium for its planned US $ 3 billion sovereign bond issuances due to the higher risk perception attached to the country by foreign investors after the recent sovereign rating downgrades, leading economists in the country opine.

Fitch Ratings in early March downgraded Sri Lanka’s sovereign rating to ‘B+’ with a negative outlook while Standard & Poor’s (S&P) put the country on a negative rating watch. According to former Central Banker and economist Dr. W.A. Wijewardena, the country will have to pay at least 2 percent additional risk premium on the planned sovereign bond/s, under these circumstances. Sri Lanka’s most recent US $ 1.5 billion, 10-year sovereign bond in October 2015 was issued at a yield of 6.85 percent but is now trading at 7.29 percent (a slight improvement from a week ago) in the secondary market.

This means the country’s cost for the planned bond issue could reach close to a hefty 10 percent.“So, the bottom line is, Sri Lanka will have to borrow at a higher rate. At this moment, the rate is immaterial for them (the government) and what is needed is the money,” said Dr. Wijewardena.

The Sri Lankan government needs approximately US $ 4.3 billion for foreign currency debt servicing due in the next 12 months and the planned sovereign bond/s funds along with a US $ 1.5 billion International Monetary Fund (IMF) bailout package could provide some respite to overcome the looming balance of payment (BoP) and debt crises faced by the government.

SL’s planned... Sri Lanka’s gross official reserves depleted to US $ 6.6 billion by end-February 2016 from US $ 7.3 billion by end-2015 due to the debt service payments and the supply of foreign exchange to the domestic foreign exchange market largely to cover the demand arising from foreign investors who moved their funds away from the government securities market. The US $ 4.3 billion outflows however include dollardenominated Sri Lanka development bonds held by the local investors and US $ 875 million worth of currency swaps of which a major share will be rolled over. Meanwhile, another former Central Banker and economist, Prof. Sirimevan Colombage said even the potential of raising funds, in the form of foreign borrowings or foreign direct investments, was extremely limited, given the downgrading of the rating scales and weak macroeconomic fundamentals. In an article published in our sister paper The Sunday Times, Prof.

Colombage referred to the Central Bank’s announcement to borrow US $ 3 billion in sovereign issue/s as a further “indication of the worsening situation” of the weak external finances. However, Murtaza Jafferjee, another economist, is of the view that replacing the recent foreign outflows from government bonds (hot money) with the planned sovereign bond, which is a medium to long-term instrument, is not a bad idea. Commenting on Fitch’s rating downgrade, he said, “They are now in line with Moody’s and S&P. Most investors follow Moody’s who had a lower rate (B1) so this would not have had a major impact on most international investors.” Meanwhile, senior economist Deshal de Mel said the yields of the planned issuances would not be excessively high if the government could enter into a programme with the IMF in the short term and begin a credible fiscal consolidation plan while obtaining parallel budgetary support from the World Bank and other parties. “These measures would instil some confidence in the market and buy some time, which would enable entry into the bond market at the most opportune moment in terms of pricing later on in the year. The key to rebuilding confidence will be the credibility of the fiscal consolidation plan - the IMF would be seen as giving more teeth to such a plan,” de Mel added. The timing of the planned sovereign bond issuances is still not clear but de Mel said such need not be immediate and could be for anytime during the course of the year.

 

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