By Paneetha Ameresekere
Ceylon Finance Today: The Central Bank of Sri Lanka (CBSL) which plans to raise a Sovereign Bond of US$ 1.5 billion on behalf of the Government of Sri Lanka (GoSL) after next month's polls, has held road shows and meetings in this connection in London, Hong Kong, Singapore and New York recently, according to market sources.
The tenure of the Bond will be five years, an official who didn't want to be named told Ceylon FT. "CBSL doesn't want the tenure to be longer than that for fear that the market would ask for higher rates in the backdrop of a buoyant US economy, where the Federal Reserve System is expected to raise rates, after a lapse of over eight years, by the middle of next year," the official said.
The last time GoSL raised money in international markets was in April, where it borrowed US$ 500 million of a five year tenure at a 5.125 per cent interest rate. "This time the interest charged will be higher, but at the same time demand is slack, which will put a cap on an 'untoward' spike in rates," an official said Earlier, on 6 January, 2014, the Sovereign raised US$ one billion, also of a five year tenure, but at a higher interest rate of 6%.
The problem facing Sri Lanka's external sector, which results in GoSL having to borrow from international commercial markets, is that it runs a continuous trade deficit.
According to latest statistics, the trade deficit in the first 10 months of the year increased by 4.3% year on year (YoY) to US$ 6.79 billion. Sri Lanka last established a trade surplus 37 years ago in 1977.
Currently, CBSL is protecting the local currency from further depreciating pressure at Rs 131.99 to the US dollar in interbank "spot next" and "spot next next" trading, while on Friday (26 December), CBSL allowed the administered "spot" price to depreciate by 15 Sri Lanka cents to Rs 131.15 to the dollar on that day.
He further said that while major international currencies worldwide are depreciating against the dollar due to the recovery of the US economy, here it was being protected and not allowed to depreciate.
The official didn't discount what happened in November 2011 and February 2012 once more being repeated, where CBSL/GoSL let go of the rupee due to pressure on CBSL's external reserves; then too after continuously protecting it at the Rs 110 level against the dollar in "spot" trading for months.
It was devalued by 3% in Budget 2012 presented in November 2011 to Rs 113.40 but the pressure persisted due to import demand, after which CBSL virtually let go of defending the local currency three months later in February 2012, which resulted in the exchange rate (ER) closing 2012 at the Rs 127 level.
Nevertheless, with private sector credit growth being low, it grew by 5.1% in October on a YoY basis according to latest statistics, compared to a recent record high of 34.5% on a YoY basis, established three years ago in December 2011. Sources said that the recent demand for dollars was due to credit once more picking up, a condition favoured by CBSL.
Meanwhile, top officials of the Central Bank defended the Bank's ER policy on the basis that CBSL has reserves of more than US$ eight billion. But when it was pointed out that this was borrowed money, they said that the debt to GDP ratio in the USA was 114%, while even in the UK this ratio was high.
They said that outflows in the government securities market (GSM) was not a concern, because they had received over a billion dollars of net inflows. Since August, net outflows from the GSM have totaled Rs 48 billion (US$ 365 million). Meanwhile, GoSL's foreign debt servicing commitments in the 12 months to October 2015 have been estimated at US$ 6.9 billion.
Central Bank officials declined to comment on the proposed Sovereign Bond sale at the present time.
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The tenure of the Bond will be five years, an official who didn't want to be named told Ceylon FT. "CBSL doesn't want the tenure to be longer than that for fear that the market would ask for higher rates in the backdrop of a buoyant US economy, where the Federal Reserve System is expected to raise rates, after a lapse of over eight years, by the middle of next year," the official said.
The last time GoSL raised money in international markets was in April, where it borrowed US$ 500 million of a five year tenure at a 5.125 per cent interest rate. "This time the interest charged will be higher, but at the same time demand is slack, which will put a cap on an 'untoward' spike in rates," an official said Earlier, on 6 January, 2014, the Sovereign raised US$ one billion, also of a five year tenure, but at a higher interest rate of 6%.
The problem facing Sri Lanka's external sector, which results in GoSL having to borrow from international commercial markets, is that it runs a continuous trade deficit.
According to latest statistics, the trade deficit in the first 10 months of the year increased by 4.3% year on year (YoY) to US$ 6.79 billion. Sri Lanka last established a trade surplus 37 years ago in 1977.
Currently, CBSL is protecting the local currency from further depreciating pressure at Rs 131.99 to the US dollar in interbank "spot next" and "spot next next" trading, while on Friday (26 December), CBSL allowed the administered "spot" price to depreciate by 15 Sri Lanka cents to Rs 131.15 to the dollar on that day.
He further said that while major international currencies worldwide are depreciating against the dollar due to the recovery of the US economy, here it was being protected and not allowed to depreciate.
The official didn't discount what happened in November 2011 and February 2012 once more being repeated, where CBSL/GoSL let go of the rupee due to pressure on CBSL's external reserves; then too after continuously protecting it at the Rs 110 level against the dollar in "spot" trading for months.
It was devalued by 3% in Budget 2012 presented in November 2011 to Rs 113.40 but the pressure persisted due to import demand, after which CBSL virtually let go of defending the local currency three months later in February 2012, which resulted in the exchange rate (ER) closing 2012 at the Rs 127 level.
Nevertheless, with private sector credit growth being low, it grew by 5.1% in October on a YoY basis according to latest statistics, compared to a recent record high of 34.5% on a YoY basis, established three years ago in December 2011. Sources said that the recent demand for dollars was due to credit once more picking up, a condition favoured by CBSL.
Meanwhile, top officials of the Central Bank defended the Bank's ER policy on the basis that CBSL has reserves of more than US$ eight billion. But when it was pointed out that this was borrowed money, they said that the debt to GDP ratio in the USA was 114%, while even in the UK this ratio was high.
They said that outflows in the government securities market (GSM) was not a concern, because they had received over a billion dollars of net inflows. Since August, net outflows from the GSM have totaled Rs 48 billion (US$ 365 million). Meanwhile, GoSL's foreign debt servicing commitments in the 12 months to October 2015 have been estimated at US$ 6.9 billion.
Central Bank officials declined to comment on the proposed Sovereign Bond sale at the present time.
www.ceylontoday.lk
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