Sri Lanka Considers Offering Hedging Options to Attract Foreigners
Sri Lanka Considers Offering Hedging Options to Attract Foreigners
(Bloomberg) -- Sri Lanka is planning incentives to attract overseas investors into local-currency bonds in a bid to reduce the nation’s reliance on foreign debt amid the coronavirus pandemic.
The island nation will for the first time offer global funds forward risk cover via a swap to help protect their local debt holdings, Ajith Nivard Cabraal, state minister of finance, capital markets and public enterprise reform, said by phone. The rupee, which was trading at 181.18 to a dollar on Jan. 1 plunged 8% to a record low in April before recovering to 184.26.
Sri Lankan assets have suffered from an exodus of foreign investors in recent years amid a clouded economic outlook following the political upheaval in 2018 and the Easter Sunday terror attacks last year. The nation in January 2019 slashed the overseas investment limit in treasury bills and bonds to 5% of the total outstanding stock to curb outflows as the rupee hit multiple record lows.
“When foreign inflows start and gather momentum, our exchange rate will strengthen, resulting in a very favorable impact on our public debt stock as well as debt servicing,” Cabraal said in an interview.
The nation could attract about $3.5 billion to the local debt market over the next year, which “would make a huge difference to Sri Lanka’s external account,” he said.
“We have already seen a reasonable investor interest to this proposal when it was mooted to a few key investors,” said Cabraal, a former central bank governor.
Foreign investment in Sri Lanka’s rupee debt is down to around 12 billion rupees ($60 million) from some 450 billion rupees in 2014. The country’s domestic debt of rupee bonds and bills stands at about 6 trillion rupees, according to central bank data.
A formal announcement on incentives and measures to encourage foreign investors to rupee bonds will be made in the coming days, Cabraal said.
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