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Bonds & Forex

Sri Lanka builds ‘war chest’ for looming debt repayments: CB Governor

ECONOMYNEXT – Sri Lanka’s central bank is using periods when there are no debt repayments to raise funds for a ‘war chest’ that could be used to settle domestic and foreign borrowings that fall due in the next two years, its governor Indrajit Coomaraswamy said.

The central bank is reasonably confident of being able to handle the bunching up of repayments in 2018 and 2019 provided fiscal consolidation measures remain on track, he told the Financial Sector Investment Conference organised by Asia Securities.

The recovery under way in major economies should also help Sri Lanka by improving demand for its exports and increased tourist arrivals, he added.

Oil prices are also likely to not go beyond $60 a barrel as shale oil production in the United States becomes economical at that level.

On long term debt,  Coomaraswamy said the cost of raising sovereign bonds will come under upward pressure as normalisation of monetary policy takes place in major economies.

“Because we are a twin-deficit economy, we have a fairly high premium above the risk free rate  – that’s the 10-year US Treasury rate – for our cost of borrowing.

“We need to strengthen our macro-fundamentals to the point where we drive down that premium.

“If  we are able to drive down that premium by more than the increases in the risk free rate – the US rate –then clearly, our cost of borrowing will remain neutral or come down.”

That will help negate the impact of the anticipated increase in US interest rates.

Coomaraswamy said the island’s debt is the ‘Achilles’ heel’ of the economy, making liability management a key concern.
The underlying problem was that Sri Lanka allowed exports to come down as a share of gross domestic product and allow foreign commercial borrowing to go up.

“That was a suicidal set of policies – to allow exports to collapse and go on a foreign commercial borrowing binge.”

It created a “big hole” in the economy which the new government is trying to fix, by improving export growth to get out of the debt servicing problem and havng fiscal consolidation by reducing the budget deficit.

There is peak in domestic debt repayments in 2018.

“Fortuitously in the last five months of 2017 there were no debt maturities,” Coomaraswamy said.

“So we used that space to raise money – we raised Rs20-25 billion each month since August so we will have a kind of war chest of Rs100-110 billion – a buffer to use to manage this peak  next year.

”There are 7 large issuance days next year and between those, 4-5 months where we can raise money to boost reserves. We are reasonably confident we can mange provided fiscal consolidation stays on track.”

There is an external debt repayment bunching up from 2019 onwards.

“Again, fortuitously, though we have something like $600 million of interest payments next year, there is no sovereign bond maturity. So that gives us a bit of space to try to again to build up a war chest to manage the bunching up.”

The government is changing the liability management law as the present law does not enable it to raise any money more than what is required for that particular year, which prevents it raising extra money for liability management.

“You can only raise money to finance the deficit. Because of that the new liability management bill will be presented to parliament I hope this month and passed next month which will enable that borrowing cap to be exceeded for specific purposes like liability management,” Coomaraswamy said.

“Again, there would be another cap. That will be used to raise some additional resources in 2018 to settle liabilities from 2019 onwards. The government will  also use proceeds from divestitures like the lease of Hambantota port for liability management.”
(COLOMBO, December 07, 2017)


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