Sri Lanka plans longer term sovereign bond

Minister appoints Dr Swaminathan to IPACSL as Chairperson

Nov 30, 2007 (LBO) – Sri Lanka want to issue longer term sovereign bonds going beyond the 5-year tenor issued in October, as part of a strategy to reduce pressure on domestic debt markets in 2008, a top official said. The government was looking at 7-10 year bonds to extend the tenor of its foreign debt portfolio, Treasury Secretary P B Jayasundera told a business forum organized by Citibank.

In October the government raised 500 million dollars through a sovereign bond, and it also has more than 1.5 billion dollars of 2 to 3 year dollar debt on a six month floating rate based on the London Interbank Offered Rate.

“We are looking at 200 to 300 million dollars for debt rollover,” Jayasudera said.

“We are also hoping to reduce the interest cost of some of our foreign borrowings.”

The IMF yesterday warned the government against short-term commercial borrowings saying it may push the country towards a sovereign default.

The sovereign bond, issued at 8.25 percent, has been quoted close to 10 percent. But Jayasundera said this was to be expected in the early stages.

Analysts say the government may look at a time shortly before April to sell the bond as markets are liquid at that time, which may give a better interest rate.

The budget and supporting documents presented in parliament in November showed a gap of about 400 million dollars in foreign financing.

Jayasundera said the government was trying to keep the deficit at around 7 percent of gross domestic product which indicated a compression of state expenditure.

The budget deficit target for this year is 7.8 percent of GDP.

But he said there was pressure on interest rates when this was financed from domestic markets.

This was one of the reasons the government wants to meet part of its funding requirements by borrowing abroad as it would help to reduce the crowding out of the private sector that domestic borrowing causes.

He said large corporates could also borrow abroad.

“I have told them that they are crowding out each other,” he said.

Such overseas borrowings will help stabilise the exchange rate and interest rates, he said, noting that already the proceeds of the bond sale has helped the government manage the exchange rate better.

The government is also getting 600 million dollars worth of 4-month credit from Iran to help delay payments for petroleum after a visit to the country by President Mahinda Rajapaksa, he said.

This too would help reduce pressure on the exchange rate, he said.

Sri Lank has balance of payments problem with imported oil because it is subsidized and monetary policy is loose, though policy makers have been slow to understand this.

Due to poor understanding about exchange rate behaviour on the part of the authorities Sri Lanka has had regular balance of payments troubles for more than 50 years starting from shortly after the country gained independence from the British.

Oil prices have frequently been used as an excuse for crises that come primarily from loose monetary policy and the subsidizing of imported commodities by the government. Updated