Bonds Sink, Stocks Jump as Sri Lanka Turmoil Spurs Extreme Moves

(Bloomberg) -- Sri Lanka’s sovereign dollar bonds and the rupee plunged to record lows, while the nation’s stocks surged the most in five years, as the political turmoil sent equity and bonds investors to opposite ends of the risk spectrum.

Moody’s Investors Service said the crisis would inflict lasting damage to investor confidence. Stock bulls, including Mark Mobius took a different view, namely that the upheaval may pave the way for a government focused on boosting economic growth.

Sri Lanka’s 6.75 percent 2028 dollar bonds fell 3 cents to a record low of 87.8 cents on the dollar, the most since the debt was sold in April, and the rupee slid 0.7 percent to a life-time low of 174.15 per dollar, after Former Sri Lankan President Mahinda Rajapaksa was sworn in as prime minister in a move that current leader Ranil Wickremesinghe described as an “anti-democratic coup.” The Colombo All-Share Index rallied 1.9 percent, the biggest gain since September 2013.

Sri Lankan President Maithripala Sirisena said he abruptly fired the island nation’s prime minister in part because he failed to properly investigate an assassination plot against him.

The upheaval comes as Sri Lanka faces significant bond maturities, including a $1 billion bond due in January and a $500 million debt due in April, according to data compiled by Bloomberg. The crisis is credit negative and uncertainty about the direction of Sri Lanka’s future policy could dent investor confidence, Moody’s said.

Still, there may be a silver lining to the political problems as there could be a more focused government program with Rajapaksa back in the driver’s seat, Mark Mobius, co-founder of Mobius Capital Partners, said in a Bloomberg interview.

“We could see some positive sentiment from local investors who perceive that Sirisena and Rajapaksa could work better together to boost growth,” says Adrian Perera, chief operating officer at Equicapital Investments in Colombo. “Foreign investors will hold back but we can expect Chinese investments to come in and even boost the currency.”

China Pivot

The re-entry of Rajapaksa, who had a “cosy relationship” with China, could lead Sri Lanka to pivot back to China, potentially re-opening the doors to Chinese funding, according to Nomura International (HK) Ltd.

“The immediate priority for Sri Lanka is to refinance the upcoming maturities and Chinese backing should prove helpful,” Nicholas Yap, a desk analyst at the bank, wrote in a note.

The uncertainty comes at a turbulent time for emerging-market assets, which extended declines last week amid a global rout in equities. It also comes at a crucial time for Sri Lanka, as the International Monetary Fund, under which the nation has a $1.5 billion program, has been calling for reforms to spur its economy.

The constitutional uncertainty could impact the timing of Sri Lanka’s budget, according to Aberdeen Standard Investments. “Any delays in some of the reforms associated with the budget could obviously impact the IMF program,” said Kenneth Akintewe, head of Asian sovereign debt at Aberdeen Standard in Singapore.

--With assistance from Finbarr Flynn, Anusha Ondaatjie and Lilian Karunungan.

To contact the reporter on this story: Denise Wee in Hong Kong at dwee10@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ravil Shirodkar, Divya Balji

©2018 Bloomberg L.P.