REUTERS: Sri Lanka could face balance-of-payments pressure due to foreign outflows from government securities, a government document showed yesterday, even as the island nation is in the process of raising up to US$2.5 billion from foreign borrowing.
The Central Bank is aiming to tap the international market for up to US$1 billion through a syndicated loan and up to US $1.5 billion via a sovereign bond.
A document submitted by the Finance Ministry this week for the approval of the sovereign bond said a possible U.S. rate hike, exchange rate volatility, and rising domestic interest rates could induce foreigners to sell government securities ‘prematurely to minimise any capital losses’.
The total net foreign outflow from the government securities in 2016 was US$324.3 million, while offshore investors have sold a net Rs.22 billion (US$146 million) worth of securities in January alone, the document seen by Reuters showed.
“If this continues, expected level of foreign investment in T-bills and T-bonds would not be materialised,” it said.
“As a result, foreign investment in T-bonds and T-bills is expected to be further withdrawn by foreign investors in 2017, creating pressure on the balance of payments by a net foreign currency outflow.” Finance Minister Ravi Karunanayake yesterday said the foreign outflow was mainly due to sell off by a single US-based foreign fund. The Finance Ministry has said the economy has recovered after facing BOP and debt crisis in 2015 with US$1.5 billion loan from the International Monetary Fund (IMF) approved last year.
The global lender has urged Sri Lanka to shore up reserves, reduce budget deficit, raise state revenue, and revive loss-making state-owned enterprises.
Sri Lanka’s rupee currency is under pressure due to foreign outflows and importer dollar demand. It has weakened 0.8 percent so far this year after falling 3.9 percent last year, following a 10 percent drop in 2015.
The island nation’s expected outflows in the next 12 months are US$ 4.7 billion, official data show.
Central Bank Governor Indrajit Coomaraswamy last week said the loans and divestment from some non-strategic state-owned assets and expected inflows from leasing a stake in a shipping port could boost foreign exchange reserves to US$ 7.5 billion by the end of this year from US$ 6 billion at the end of 2016.
Despite Franklin Templeton, one of the world’s largest investment management firms continuing to sell Sri Lankan government securities, Finance Minister Ravi Karunanayake remains confident that Sri Lanka would get favourable rates for its upcoming sovereign bond issue.
“When you say exits, there is only one guy. That is Templeton. They’re the ones who created the problem when they came in with a fixed interest rate of 14.85 percent. These are the same guys that are creating (high rates) with the exits that are there. So you can see these are manipulations,” he said. He said that as a business, Franklin Templeton would always try to increase their returns.
“But we have been caught with past practices. They came in. We can’t force them to keep it,” Karunanayake said. He said that market rates are likely to increase, before they start falling down, which independent analysts are also projecting, since the current rates have already factored in future US Federal Reserve rate hikes.
Analysts opine that government securities sales are likely to slow down during the latter part of the year.
Karunanayake however said he is confident that the government would be able to attract even better rates than what it attracted during the US $ 1.5 billion syndicated loan last year. Sri Lanka is gearing to raise up to US $ 1.5 billion through a sovereign bond issue and another US $ 1 billion through a syndicated loan.
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