Sri Lanka issues its first inflation linked bond

Sri Lankan government Wednesday issued its maiden inflation linked bond by privately placing it with two-state banks. Sri Lankan government Wednesday issued its maiden inflation linked bond by privately placing it with two-state banks. The funds raised, will help the government clear part of it’s overdrafts currently owed to state-own Bank of Ceylon and People’s Bank.

The three-year tradable bond comes with a 11 percent coupon and gives the two state banks the opportunity of placing it in the market.

The exact quantum of the bond is not being disclosed, but market players said the two state banks are willing to offer ‘between two to three billion rupees’ worth of paper.

The issue is priced at 11.2 percent for the first year. For the next two-years the price is linked to one percent above the country’s annual inflation rate.

““This issue is quite good, in the sense it commits the treasury to keep inflation down. It’s like putting the government on a treadmill,” said Ajith Fernnado Chief Executive Capital Alliance Holdings, a private debt house in Colombo.

Sri Lanka’s inflation rate, as measured by the Colombo Consumer Price Index (CCPI) had slipped to 12.1 percent in November, as prices of some food items eased up.

The government uses the 12-month average – as measured by the CCPI – to calculate the country’s inflation data.

Sri Lanka’s Central Bank expects year end inflation to rise up to 10.0 percent from 7.6 percent in 2004

“It’s an ideal investment for pension funds and insurance companies, who get a one percent real return, unlike investing in negative yielding government bonds as is the case now,” said a dealer attached to a state-run pension fund.

Sri Lanka hopes to borrow Rs. 122.9 billion from the domestic market and Rs. 66.4 billion from foreign sources next year, Finance Minister Mahinda Rajapakse said while presenting the country’s recent budget.

Today’s issue comes on the heels of Sri Lanka securing its first sovereign rating, which helps the island to issue bonds in the international market to rebuild its war-damaged and tsunami-hit economy.

Two international rating agencies – Fitch and Standard & Poor’s – assigned speculative grade rating to the country.

Fitch Ratings gave the nation a BB- rating, which is three notches lower than the lowest investment grade rating of BBB-, but with a long-term stable outlook.

New York based Standard & Poor’s assigned B+ ‘highly speculative’ rating. The outlook is stable, the firm said.

The government had commissioned Moody’s too for a rating, but their classification was not published as widely expected by markets here.

Rajapakse said the government hopes to issue three-five year dollar bonds next-year to over a million Sri Lankans living and working overseas.

-Mel Gunasekera: mel@vanguardlk.com