Investors sell Sri Lanka rupee bonds amid political in-fighting
ECONOMYNEXT – Foreign investors in Sri Lanka rupee bonds have started to cut their portfolios amid conflicts between President Maithripala Sirisena and Prime Minister Ranil Wickremesinghe and an electoral drubbing in local council elections.
Some foreign investors started cutting their portfolios a week before the local council polls with overseas holdings falling from 330 billion rupees on January 30 to 324 billion rupees by February 07, according to central bank data.
By February 20, holdings had come down to 320 billion rupees. Some fluctuations in foreign investor holdings happen, dealers say.
Bond yields started to move up, from around January spiking sharply in the third week, after President Sirisena said he was going to take-control of economic management. (Sri Lanka bonds yields up, stock open lower after Presidential bombshell)
Dealers say they also cut holdings of long bonds ahead of the polls, as uncertainty built up, sending yields higher.
Though the United National Party’s record of economic management took a battering in the 2015 and 2016 budgets, with Mangala Samaraweera as finance minister and Eran Wickremaratne as State Minister investor credibility had risen, dealers said.
Foreign investors who dumped Sri Lanka bonds from April 2015 after a central bank cut rates printed money to create a balance of payments crisis, came back to the market from around April 2017, after Central Bank Governor Indrajit Coomaraswamy tightened policy.
By late March foreign investments in rupee bonds had fallen to 196 billion rupees.
By February 07, foreign investors had bought 330 billion rupees of bonds.
Over the last two weeks the central bank had not printed money to buy Treasury bills and the rupee had stabilized, amid weaker private credit. If the central bank does not print money to buy Treasury bills and insert artificial reserves to the banking system, banks can either buy a bond for give credit with their deposits.
A balance of payments crisis is created when the central bank either via T-bill auctions or reverse repo operations injects liquidity over and above real deposits, banks can both give credit and buy bonds, triggering BOP trouble. (Colombo/Feb20/2018)