Credible Deficit Plan to Help Sri Lanka Sell $3 Billion of Bonds Annually
Credible Deficit Plan to Help Sri Lanka Sell $3 Billion of Bonds Annually
(Bloomberg) -- Sri Lanka must come up with a plan to narrow its budget deficit as the top Asian issuer of sovereign dollar debt after China this year prepares to sell $3 billion of bonds annually.
The island-nation, which elected Gotabhaya Rajapaksa as its president last week, has to raise debt commercially to service earlier borrowings, Central Bank Senior Deputy Governor Nandalal Weerasinghe said.
“We need to have clear government policies that are aimed at maintaining access to capital markets,” Weerasinghe said in an interview in his office overlooking the Colombo port. “The rating agencies should see this as a viable proposition and a sustainable plan.”
Sri Lanka’s budget gap is set to widen to the most in four years after terror attacks in April robbed the nation of tourism revenue that fuels 5% of the economy. The setback came on top of a cut in the nation’s rating deeper into junk by Moody’s Investors Service in November last year following a protracted leadership crisis.
“That’s what we have to aim for, to see an emerging trend where the fiscal is getting sharper and consolidation is taking place,” said Ajith Nivard Cabraal, a former central bank governor and economic adviser to President Rajapaksa.
Tourist arrivals to Sri Lanka, famous for whale-watching sites in Trincomalee, Buddhist temples in Kandy and pristine beaches, are down 21% this year. The nation earned $4.4 billion from overseas visitors in 2018.
Sri Lanka in June sold $2 billion of sovereign debt at a yield 25 basis points lower than initial indicative coupon after raising $2.4 billion in an overseas bond sale in March to help boost reserves and repay debt. China, which is targeting to sell $6 billion of bonds, on Tuesday announced final price guidance for the debt.
Samurai Bonds
The nation also plans to sell 10-year bonds with a guarantee from the Japan Bank for International Cooperation. The central bank in October chose Mizuho Securities, SMBC Nikko Securities and Mitsubishi UFJ Morgan Stanley Securities to manage the sale equivalent of $500m.
“The Samurai has given us an opportunity to diversify the market,” Weerasinghe said. “Also, interest rates are more competitive compared with the dollar markets, even if you factor in the premium of conversion costs.”
President Rajapaksa appointed his brother Mahinda as the island’s new prime minister and finance minister. The two strongmen face an economy where growth slowed to a more than five-year low in the June quarter with debt level hovering at 83% of GDP.
Gotabhaya has offered more subsidies for farmers and promised sweeping tax cuts as part of his plan to revive growth. That may further hurt the budget deficit.
Sri Lanka’s interim cabinet in its first meeting on
Wednesday approved a plan to cut the value-added tax to 8% from 15%, removed capital gains levy on share transactions and slashed income tax for the construction industry, spokesman Bandula Gunawardena said in Colombo.
The yield on Sri Lanka’s dollar bond due in 2030 declined 0.2 cents on the dollar to 99.4 cents, the lowest since early October.
Excerpts from the interview:
- Weerasinghe sees rupee “quite stable now.” “We are in a good position” as the authority had raised adequate funds from overseas and bought U.S. dollars from the market to build up a buffer ahead of elections.
- Consumers ability to service debt has improved since the cap on lending rates, he said. The cap won’t have an impact on bank balance sheets as the central bank has also helped bring down the cost of funds. NPLs to gradually ease.
- Monetary policy decision to remain linked to inflation outlook and output gap. To watch next year’s budget presentation to gauge new government’s policy stance.
- Doesn’t see “significant trade diversion” despite Sri Lanka’ advantage of having considerable Chinese investments in ports and other commercial projects.
- “As far as investments moving around, I don’t think it will happen until there’s more clarity on U.S.-China trade talks.”
--With assistance from Finbarr Flynn.
To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net
To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net, Ravil Shirodkar
©2019 Bloomberg L.P.