StanChart upgrades SL bonds on economic and revenue upside

• Says buoyed by recent economic performance in Sri Lankan economy
• Upgrades economic growth to 4.2% in 2025 from 3.5%
• Says 75bps coupon cut possible on Governance-Linked Bond, reducing debt service burden
• Asserts it prefers owning 2036 and 2038 Macro-Linked Bonds over 2035 GLB as former trade 85-100bps wide  

Standard Chartered Research (StanChart Research) sees a rising likelihood of upside scenarios for Sri Lanka’s sovereign bonds issued last year under its bond exchange, as the country is expected to outperform baseline economic growth targets and meet government revenue targets that could trigger coupon reductions.

These improved economic prospects have prompted StanChart to recommend increasing allocations to Sri Lanka-issued Macro-Linked Bonds (MLBs) and Governance-Linked Bonds (GLBs), reinforcing what the bank calls an “overweight” position in Sri Lankan bonds.

Sri Lanka completed its commercial debt restructuring in December last year, exchanging a series of MLBs, a GLB, and a Past-Due Interest (PDI) bond for defaulted sovereign bonds from 2022.

StanChart’s optimism over the MLBs and GLBs is supported by stronger-than-baseline economic growth and higher government revenue collections, a key performance indicator (KPI) for coupon reductions in the GLB.

The bank raised its Gross Domestic Product (GDP) growth forecast for Sri Lanka in 2025 to 4.2 percent from 3.5 percent in July, “on the back of the improved consumption and investment demand as reflected in strong Q1 GDP of 4.8 percent and subsequent high-frequency data,” it said in a recent Credit Alert.

“A continued tourism recovery and robust remittances have also been supportive, helping Sri Lanka post a current account surplus of US$ 1.5 billion in H1-2025,” the alert added.

Under these conditions, the London-based lender increased the probability of achieving the most optimistic GDP scenario between 2025 and 2027 to 67.5 percent from 62.7 percent, boosting probability-adjusted cash flows for the MLBs.

Under this scenario—referred to as “scenario 1” by StanChart—Sri Lanka is projected to record an average nominal GDP of US$ 107.0 billion between 2025 and 2027, 21 percent above the IMF’s baseline of US$ 88.6 billion. This could result in a 2.0 percent coupon adjustment for the 2028 and 2032 period, with a nominal value reinstatement of 22.0 percent.

StanChart also sees a 72.4 percent probability of Sri Lanka achieving a revenue-to-GDP ratio of 15.3 percent in 2026 and 15.4 percent in 2027—referred to as “KPI 1”—which would trigger a 75 basis point coupon reduction on the GLB.

“…we estimate a 72.4 percent probability of satisfying KPI 1, implying a 9.68 percent yield for the GLB,” the bank said.

It assigned a 100 percent probability to KPI 2, which requires the government to publish the Fiscal Strategy Statement for 2026 and 2027. StanChart believes this acts as an incentive for the government to secure the 75bps coupon cut on the GLB and reduce debt-service obligations

Nevertheless, StanChart prefers owning the MLBs maturing in 2036 and 2038 over the 2035 GLB, as they trade 85 to 100 basis points wider than the 2035 GLB, with yields of 10.53 percent and 10.66 percent respectively.

“While SRILAN 35 (2035 GLB) should be tighter given greater certainty of its cash flows, we think 85-100bps is too wide,” StanChart said.