Sri Lanka’s improved credit assessment comes as the island plans to raise $1 billion from the sale of dollar-denominated bonds in its fourth international offering. The nation’s foreign-currency rating remains at B1, four levels below investment grade. Standard & Poor’s upgraded the island’s credit rating by one level to B+ on Sept. 14.
The country may be able to attract more foreign funds and lower its borrowing costs, further bolstering economic growth after the end of a three-decade civil war against separatist Tamil Tiger rebels. The risk premium on emerging-market debt has shrunk to 3.14 percentage points from 8.91 points during the global financial crisis, according to an index compiled by JPMorgan Chase & Co. (JPM)
“Sri Lanka has started to reap a peace dividend that has accrued to the economy and the security environment,” Moody’s said in a statement. “The economy is expected to grow sustainably at around 8 to 9 percent over the medium term as confidence is further bolstered and investment picks up.”
Central bank Governor Nivard Cabraal forecasts economic growth to accelerate to 8.5 percent this year, from a 32-year high of 8 percent in 2010, because of rising demand and investment after the civil war.
Foreign Investment
Sri Lanka received a record $236 million of foreign direct investment in the first quarter of 2011, with the tourism industry attracting most of the inflows, the island’s Board of Investment said June 7.
“Sri Lanka has a number of challenges including high fiscal deficit, lack of infrastructure and high dependence on short-term foreign financing,” said Morten Bugge, chief investment officer at Kolding, Denmark-based Global Evolution AS, said July 15. The country also has “high growth, attractive labor costs and a unique strategic geographical location that could be the opportunity for the future, especially in port activities.”
Bugge, who oversees $800 million of assets including Sri Lanka sovereign debt, will consider buying the new global bonds as well as the nation’s local-currency debt.
Monetary Policy
The central bank has refrained from boosting rates since 2007, breaking with Asian nations from India to Thailand that have tightened monetary policy to damp price pressures.
Sri Lanka’s inflation will ease over time and the nation’s monetary conditions support faster expansion, according to the International Monetary Fund, which in April disbursed $218.3 million to Sri Lanka as part of its $2.6 billion loan package.
The government hired HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc, Barclays Plc and Bank of America Merrill Lynch to arrange the bond sale and is briefing investors in Asia, the U.S. and Europe from July 11, Deputy Governor Dharma Dheerasinghe said on July 6. It may sell debt maturing in 10 to 15 years, Dheerasinghe said June 17.
Bank of America, HSBC and RBS managed Sri Lanka’s $1 billion 10-year bond offering in September 2010, which garnered more than $6.3 billion of orders. The notes were sold at a yield of 6.25 percent, 373 basis points more than similar-maturity Treasuries. That sale followed two $500 million offerings of five-year bonds in October 2009 and October 2007.
“We would like to see if the improved peace conditions can also attract more foreign direct investment and tourism,” Global Evolution’s Bugge said. “Sri Lanka is a good story. I would like to see some of the things above being handled before additional rating upgrades.”
By Anusha Ondaatjie and David Yong - Jul 18, 2011 7:20 AM GMT+0530 [b]