Sri Lanka warned off short-term debt as T-bills opened to foreigners

May 07, 2008 (LBO) – Standard & Poor’s (S&P) has warned of the narrowing maturity of Sri Lanka’s commercial debt just as the country opened its Treasury bill market to foreign investors. “The rising share of external debt, estimated at about 49 percent of total, and within that, the proportion of more expensive and shorter-maturity commercial funds, is gradually eroding what has so far been a relatively favorable debt profile,” S&P said in a report on rated sovereigns in Asia.

“Sri Lanka’s debt composition has also changed adversely, in terms of currency, maturity, and source.”

Bang Chune

S&P said many of the Asia-Pacific sovereigns which had enjoyed high growth and low inflation are likely to continue to be on a strong footing.

“But just like in consuming food and wine, while the prudent ones eat and drink in moderation, a few don’t seem to know when to apply the brakes,” S&P said in a report titled When Times Call For Prudence, Will Asian Sovereigns Show It?

“For the sake of short-term pleasure, those few might be willing to overlook increasing signs of a looming hangover or even longer-term health damage.”

The reported highlighted Sri Lanka, Vietnam and Indonesia as countries to “keep an eye on”.

“In the face of mounting challenges, policy responses will naturally shape consequences, including rating actions,” S&P said.

Sri Lanka has been finding it difficult to extend the maturity of its short-term debt this year as credit conditions tightened in global capital markets.

Tighter Credit

A call for a 300 million dollar syndicated loan of 5 years or more in March resulted in a commitment of just 50 million dollars in 5-year money. A commitment for a further 150 million dollars came with a one-year put option.

Other lenders were prepared to lend only one year money. The deals are expected to be closed this month. In June a 250 million dollar bond issue is falling due.

In the first half of 2007, the government was able to sell around 400 million dollars worth rupee denominated Treasury Bonds with a significant volume of 5-year bonds being sold to foreigners.

However, post-July 2007 buyers of rupee bonds – mainly hedge funds – have tended to trade down to shorter maturity bonds, of 11 to 15 months.

The Treasury bills are issued in 3, 6, and 12 – month maturities.

Policy Flexibility

Sri Lanka budgets have weakened in recent years and budgets deteriorated after subsidies, expanding the public sector and an intensifying conflict became key policy imperatives.

S&P has rated Sri Lanka B+ but its outlook was cut to negative this year, but the underlying rating has so far been maintained. Fitch cut its rating by one notch to B+.

“Any signs of further fiscal slippage, either through rising expenditures or lower revenues, or a more adverse shift in government borrowing patterns, would lead to a rating downgrade,” S&P said.

“Failure to adopt such measures could threaten macroeconomic stability and ratings.”

Sri Lanka’s inflation at 25 percent in April 2008 also put the country’s macro-economic management skills on public display.

“Sri Lanka’s persistently high inflation, currently at more than 20 percent year on year suggests a need for more forceful policy actions to restore price stability.

“The lack of progress toward fiscal consolidation indicates that the government continues to prioritize growth and uses high levels of government expenditure to achieve it.”

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