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Sri Lanka’s economy: building bricks

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1Sri Lanka’s economy: building bricks  Empty Sri Lanka’s economy: building bricks Fri Jul 22, 2011 6:43 am

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

Far away from the sovereign credit doldrums affecting Europe, a small island state in the Indian ocean seems to be attracting the attention of foreign investors.

Sri Lanka raised $1bn on Thursday after its 10-year bond sale was seven times subscribed, in a sign that investors remain confident that the island’s sustained economic recovery is on track.

Sri Lanka’s successful dollar-denominated bond sale – the third since the  devastating civil war ended in 2009 – reflects the strong economic comeback of the island following 26-years of political, economic and humanitarian strife

The 10-year bond was priced at 6.25 percent, which is a 332.2 basis points premium over the benchmark 10-year US Treasury, said Ajith Nivard Cabraal, Sri Lanka’s central bank governor.

“In a sea of uncertainty, volatility and global complications we stand out,” said Cabraal. “The hard work we put in over the last three years to get our macroeconomic fundamentals into shape is now paying off and many people have really latched on to the country’s overall growth story.”

Sri Lanka’s growth rate has rebounded sharply since the end of civil war in May 2009, with annual gross domestic product growth expected to reach a new record of 8.5 per cent this year. This comes after reaching a record 8 per cent in 2010 and just 3.5 per cent in 2009. Stocks on the local Colombo Stock Exchange have soared from a immediate post-war low of 3,000, to a current 6,500.

The island’s third overseas debt sale attracted $7.28bn, with 27 per cent of sales coming from Asia, 30 per cent from Europe and 43 per cent from the US, according to a person familiar with the matter.

Cabraal said that most of the money raised via the bond sale would be used to invest in upcoming infrastructure projects and to refinance exiting debt.

Investors’ backing follows that of international rating agencies. Standard & Poor’s and Moody’s recently upgraded Sri Lanka’s long-term foreign currency rating, while Fitch upgraded the island’s sovereign rating to BB-, three notches below investment grade.

“We revised our outlook on the foreign currency rating to reflect the improving external liquidity, progress in addressing structural fiscal weaknesses, the government’s effort to keep inflation near that of trading partners,” said Standard & Poor’s credit analyst Takahira Ogawa. “The ratings incorporate our expectation of gradual improvement in public finances, via tax reform and better management of government-owned companies, he added.

Art Woo, Director in Fitch’s Asia Sovereign Ratings group, said: “The upgrade reflects the stabilization and recovery of the economy under the country’s IMF programme and increased efforts to address the chronic budget deficit position.”

All in all it looks as though the only way is up for the island of Sri Lanka.

Academic


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Quibit wrote:Far away from the sovereign credit doldrums affecting Europe, a small island state in the Indian ocean seems to be attracting the attention of foreign investors.

Sri Lanka raised $1bn on Thursday after its 10-year bond sale was seven times subscribed, in a sign that investors remain confident that the island’s sustained economic recovery is on track.

Sri Lanka’s successful dollar-denominated bond sale – the third since the  devastating civil war ended in 2009 – reflects the strong economic comeback of the island following 26-years of political, economic and humanitarian strife

The 10-year bond was priced at 6.25 percent, which is a 332.2 basis points premium over the benchmark 10-year US Treasury, said Ajith Nivard Cabraal, Sri Lanka’s central bank governor.

“In a sea of uncertainty, volatility and global complications we stand out,” said Cabraal. “The hard work we put in over the last three years to get our macroeconomic fundamentals into shape is now paying off and many people have really latched on to the country’s overall growth story.”

Sri Lanka’s growth rate has rebounded sharply since the end of civil war in May 2009, with annual gross domestic product growth expected to reach a new record of 8.5 per cent this year. This comes after reaching a record 8 per cent in 2010 and just 3.5 per cent in 2009. Stocks on the local Colombo Stock Exchange have soared from a immediate post-war low of 3,000, to a current 6,500.

The island’s third overseas debt sale attracted $7.28bn, with 27 per cent of sales coming from Asia, 30 per cent from Europe and 43 per cent from the US, according to a person familiar with the matter.

Cabraal said that most of the money raised via the bond sale would be used to invest in upcoming infrastructure projects and to refinance exiting debt.

Investors’ backing follows that of international rating agencies. Standard & Poor’s and Moody’s recently upgraded Sri Lanka’s long-term foreign currency rating, while Fitch upgraded the island’s sovereign rating to BB-, three notches below investment grade.

“We revised our outlook on the foreign currency rating to reflect the improving external liquidity, progress in addressing structural fiscal weaknesses, the government’s effort to keep inflation near that of trading partners,” said Standard & Poor’s credit analyst Takahira Ogawa. “The ratings incorporate our expectation of gradual improvement in public finances, via tax reform and better management of government-owned companies, he added.

Art Woo, Director in Fitch’s Asia Sovereign Ratings group, said: “The upgrade reflects the stabilization and recovery of the economy under the country’s IMF programme and increased efforts to address the chronic budget deficit position.”

All in all it looks as though the only way is up for the island of Sri Lanka.

I should appreciate GOSL in this timely move. This is the high time to issue dollar denominated bonds, as cherished AAA rating of US and risk-freeness of some European governments are questionable.

Further, if USD depreciated compared to LKR in long-run, the real interest rate we would be paying may be less than the nominal rate, 6.25.

Any other views?

cheers

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

I guess already 1/8 of 1 billion dollars is going to vanish to pay the standard charted oil hedging money (not sure how much is the interest and the court expenses) if other 2 banks also sue the government it'll add up.
Hope this money is put into development not something like building a sports city in hambantota like the cricket stadiums.

UKboy

UKboy
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

duke wrote:I guess already 1/8 of 1 billion dollars is going to vanish to pay the standard charted oil hedging money (not sure how much is the interest and the court expenses) if other 2 banks also sue the government it'll add up.
Hope this money is put into development not something like building a sports city in hambantota like the cricket stadiums.

I hope and pray we will NOT get the 2018 commonwealth games.

Rajaraam


Vice President - Equity Analytics
Vice President - Equity Analytics

I hope GOVT will spend this money for needy economic development activities which will reward back the nation soon. Identifying right priority areas is the most important task rather than just waste these funds for white elephants.

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Looks like around 0.5 billion dollars will disappear for hedging deal payments alone according to the Sunday newspapers.

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