Sri Lanka opposition warns of possible default of a proposed sovereign bond

August 29, 2007 (LBO) – Sri Lanka’s main opposition announced a protest in front of HSBC Bank’s Colombo office after its leader warned that the country may not be able to repay 500 million dollars the bank is helping to raise. United National Party leader Ranil Wickremesinghe informed HSBC chief Stephen Green that the proposed debt issue would “seriously jeopardize” the public finances of the country and that it was illegal because the parliament has not been informed of the issue.

“In the current volatile conditions in global debt markets, I am concerned that the yield expected by subscribers to a Sri Lanka sovereign bond will be much higher than that obtained in the past,” Wickremesinghe wrote.

“This will hamper the sustainability of Sri Lanka’s long-term programme for servicing its existing public debt repayments and raises the very real prospects of a future default in the servicing of repayments to investors in this bond issue.”

“Moreover, Parliament has not been informed of a bond issuance of this magnitude and it is not all clear for what purpose the funds raised will be utilized.”

Senior state officials have said the funds would be utilized for infrastructure development, but in the light of earlier government statements that all projects were ‘fully funded’ questions have been raised as to the actual purpose of the funds raised.

However analysts say Sri Lanka needs some foreign funds at this time to get through a balance of payments difficulty and an economic slowdown as domestic savings are not enough to bridge an expanding budget deficit.

Due to shortcomings in Sri Lanka’s economic policy framework the country is also unable to attract substantial volumes of cheap donor funding with concessionary repayment terms.

Wickremesinghe said the government has not brought down the budget deficit to 5 percent of the economy in 2007 as envisaged by a Fiscal Responsibility law, but it would eventually be around 8 percent of the economy.

“To me it is quite evident that the government will not be able to service the repayments of the proposed bond issue on a sustainable basis, given the unfavourable security and economic environment of Sri Lanka,” Wickremesinghe said.

“For the record, I would also like to state that the United National Party has always been at the forefront of efforts to bring about transparent and effective management of government finances in Sri Lanka.

“I must therefore state that it is very likely that the Sri Lanka government’s unblemished record of honouring all its debt obligations will be seriously jeopardized if this bond issuance goes through. Furthermore this bond issue is in violation of the law.

“It is my duty therefore to inform you that a future government formed by the United National Party will not be able to honour the repayment obligations under this bond issue for the reasons stated above.”

The UNP protest comes as representatives of the joint lead managers, HSBC, JP Morgan and Barclays Bank visited Sri Lanka to conduct legal due diligence ahead of a road show to potential investors.

Standard & Poor’s lifted the outlook on Sri Lanka’s speculative B+ rating from ‘negative’ to ‘stable’ on a promise to market price energy while Fitch Ratings has given Sri Lanka a BB- rating with a negative outlook.

Energy subsidies are considered the biggest threat to Sri Lanka’s economic stability, but senior government ministers have since said that electricity or diesel prices would not be raised for rest of the year.