ECONOMYNEXT – Sri Lanka’s bond yields rose over 100 basis points across maturities at this week’s auction with 80 billion rupees out of a 100 billion rupee auction being sold, data from the state debt office showed.
22.1 billion rupees of 15.12.2023 bonds were sold at 9.36 percent, after offering 30 billion rupees.
On Monday the 2023 bond was traded at 8.35 percent.
17.9 billion rupees of 15.01.2027 bonds were sold at 11.14 percent after offering 40 billion rupees.
There had been no recent trading in the bonds.
40 billion rupees of 01.10.2032 bond were sold at 11.23 percent, after offering 40 billion rupees.
On September 28, 2030 bonds were sold around 10.23 percent.
Sri Lanka has a budget deficit of around 10 percent of the gross domestic product after cutting taxes for ‘stimulus’ and hiring 53,000 unemployed graduates to give them tax money to take home.
Up to last month price controls were placed on bonds and money was printed to finance the deficit, triggering record balance of payments deficits. Money was also printed to keep rates down for ‘monetary stimulus’.
Newly re-appointed central bank Governor Nivard Cabraal has lifted price controls.
Market estimates for this week’s maturities are around 85 billion rupees and coupons are around 16 billion rupees.
Analysts have warned that partially successful bond auctions will not help to stop forex shortages to bring back stability.
“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted,” Bellwether, EN’s economic columnist said when price controls were still place and the first-rate hike had not been made (Sri Lanka’s monetary meltdown will accelerate unless quick action is taken: Bellwether).
“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.”
However, the bond rates will lead to corrections in deposit rates and private credit.
To stop the entire burden falling on rates, state expenses must be cut and cashflow generating taxes like VAT has to be raised analysts have said. (Colombo/Oct12/2021)