Foreigners flee Sri Lankan bonds with Rs11bn outflows this week

May 10, 2019 (LBO) – Foreign institutional selling of Sri Lanka’s government bonds picked up pace in the past week with approximately Rs11bn (US$60mn) of net outflows.

Total foreign investor holdings of Sri Lankan government bonds has now reached multiyear lows, with total foreign holdings at just over US$800mn. The fallout from the Easter Sunday terror attacks has erased gains that were made following the resolution of the country’s constitutional crisis. All the net inflows into government securities after the resolution of the constitutional crisis have now been reversed.

Despite the recent foreign selling in the bond markets, Sri Lanka’s currency, the Sri Lanka Rupee (LKR), still remains significantly above the multiyear lows it reached during the constitutional crisis. At the height of the crisis, the LKR touched levels of Rs183 to the US$, while it currently sits at around Rs176 to the dollar.

While selling of bonds has picked up pace, activity at the Colombo Stock Exchange (CSE) remains muted. The last two weeks have seen an average of just Rs200mn (US$1.1mn) worth of trading per day.

Key market bellwether John Keells Holdings (JKH) has seen its value dip to a market capitalisation of just over US$1bn, with its share price at Rs137/share. The stock has been weak since the bombings, but has dropped on very low trading volumes with no sign of net foreign selling.

Stocks in Sri Lanka look cheap with total market price to earnings ratios less than 10, and the market as a whole trading at close to book value. The earnings outlook for the next few quarters is likely to be poor as the country deals with the economic fallout from the terror attacks.

The government is preparing a significant economic relief package to bolster the tourism industry, which is likely to take a significant hit. However despite the best efforts of the government, 2019 is likely to be one of the slowest years for economic growth on record. The Central Bank of Sri Lanka is yet to revise downward its growth projections for 2019 which stand at 3.5-4%.