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Wednesday June 19th, 2024

Sri Lanka opposition welcomes ESG bond idea in ISB restructure, slams secrecy

BOND PROPOSAL: Bondholders’ latest proposal involved plain bonds for missed coupons but economic performance linked bonds for the principle bonds.

ECONOMYNEXT – Sri Lanka’s main opposition Samagi Jana Balawegaya has welcomed a proposal for governance linked bonds but re-voiced objections to underlying securities linked to economic performance that are sought by sovereign bondholders in a re-structuring.

SJB said the bond holders clearly did not want to move away from macro-linked bonds, on a higher ‘alternative baseline’, based on the contents of a statement issued by the Finance Ministry after a first round of talks with bondholders in London.

RELATED Sri Lanka agrees to state contingent factor in ISB exchange, ESG bonds also in play

“The main problem with this approach from the point of view of Sri Lanka is with their proposed structure of sharing the upside,” opposition legislator Harsha de Silva, the economic spokesman of the SJB said in a statement.

“It is not acceptable given the pain already incurred and will be incurred for decades to come by domestic creditors forced upon by the domestic debt restructure.”

Sri Lanka has already re-structured bonds in pension funds without haircuts, by extending maturities.

In an apparent softening of their earlier stance the SJB said it was “possible to discuss” a value recovery instrument separate from the underlying bond, to give upside.

“We do understand the need for some type of value recovery instrument (VRI) that could be a component of the final restructured series,” de Silva said.

“[B]ut we are of the opinion that to link the same to every bond takes away the freedom of a future government to manage the nation’s liabilities in the most beneficial way for Sri Lanka. It is possible to discuss the VRI structure that is detachable from the main instrument.”

Bondholders however have come to dislike the VRIs on the basis that they cannot hold them as warrants are not index eligible. As a result, bondholders say they are forced to sell VRIs to hedge funds at low initial prices.

In the end, the benefit of any upside will not go to the ‘real money’ investors who may have bought bonds at par at issue, took haircuts and coupon cuts, but to third party hedge funds.

Many emerging market sovereign bonds are illiquid and bondholders themselves may be contributing to losing ‘market access’ by selling in panic, critics say.

A case in point was Ecuador, which is dollarized after its currency collapsed to 25,000 some years ago and the inflationists can no longer conduct ‘macro-economic policy’ and destroy the currency or create big crises but lost market access in the Covid crisis.

According to a statement released by the Finance Ministry, Sri Lanka has agreed to bonds linked to economic performance, but did not agree to the triggers or the quantum of payments to be made under various scenarios.

De Silva, who is also chairs the parliament’s Committee on Public Enterprises, earlier requested meeting with ‘relevant stakeholders’ but the government had instead scheduled a meeting with an IMF team, de Silva said.

“…[W]e note with disappointments that there has been absolutely no transparency in the government’s debt restructuring process even though we had requested for same,” de Silva said.

The talks themselves are held under non-disclosure agreements.

The full statement is reproduced below:

Response to press release 16 April 2024

These initial comments are based on the first reading of the press release by the Finance Ministry moments ago. We reserve the right to make additional comments upon in depth study of the proposals in the attachments.

At the outset, we note with disappointments that there has been absolutely no transparency in the government’s debt restructuring process even though we had requested for same.

In fact I personally requested for a meeting with the relevant stakeholders both as the economics spokesperson for the main opposition SJB and as the Chairman of the COPF.

That opportunity was not provided, instead a meeting with government officials was arranged to discuss the IMF program which we had no reason to attend as we anyway meet the delegation during their visits and exchange views on same.

From the press note it is obvious that the government has failed to strike a deal favorable to the people of Sri Lanka. We acknowledge however, that it is better to withdraw from the discussions than to agree to a bad deal.

Having said that, the statement by the head of Hon Presidents staff that the two sides agreed on two of the four issues is not accurate when the note categorically states that no agreement had been reached, only that they ‘came closer to meeting of minds’ if a significant additional payment was made and even then, contingent upon the government side agreeing to the bondholders remaining conditions.

It is clear that the participating bond holders do not want to move away from the original macro linked bond (MLB) structure they proposed based on the performance of the Sri Lanka economy to be measured on their much higher ‘alternative baseline’ as opposed to that of the IMF.

The main problem with this approach from the point of view of Sri Lanka is with their proposed structure of sharing the upside. It is not acceptable given the pain already incurred and will be incurred for decades to come by domestic creditors forced upon by the domestic debt restructure. It is now clear the alterative restructuring proposal by the government consisting of a mix of plain vanilla and MLB has been rejected by the bond holders.

We do understand the need for some type of value recovery instrument (VRI) that could be a component of the final restructured series, but we are of the opinion that to link the same to every bond takes away the freedom of a future government to manage the nation’s liabilities in the most beneficial way for Sri Lanka. It is possible to discuss the VRI structure that is detachable from the main instrument.

We are happy to note the inclusion of a discussion on a possible governance linked bond (GLB) structure and would be interested in discussing how that can be worked in to a possible instrument to be agreed upon.

We urge the government to be much more transparent in this restructuring process given that elections are around the corner and that the next government and those to come will be held responsible to honor the conditions agreed upon by this government on its final months. We are fully aware that any unilateral suspension of meeting any of the agreed payments would mean a second default which would be an absolute disaster. (Colombo/Apr16/2024)

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Central banks expect to increase gold reserves after buying 1,037 tonnes in 2023: Survey

ECONOMYNEXT – About 29 percent of central banks in the world intended to increase their gold reserves in 2023, up from 24 percent in 2023 and just 8 percent in 2019, a survey by the World Gold Council showed.

“The planned purchases are chiefly motivated by a desire to rebalance to a more preferred strategic level of gold holdings, domestic gold production, and financial market concerns including higher crisis risks and rising inflation,” the WGC said.

About 81 percent of 70 central banks that responded to the survey expected global central bank holdings of gold to go up, from 71 percent in 2023.

While in prior years, gold’s “historical position” was the top reason for central banks to hold gold, this factor dropped significantly to number five this year.

This year, the top reason for central banks to hold gold is “long-term store of value / inflation hedge” (88%), followed by “performance during times of crisis” (82%), “effective portfolio diversifier” (75%) and “no default risk” (72%).

Concerns about sanctions were listed as by 23 percent of emerging market central banks (0 advanced).

De-dollarization as a reason to hold gold gained ground, but was not among the main reasons.

About 13 percent of emerging market central banks listed de-dollarization as one of the reasons to buy gold up from 11 percent last year and 6 advanced nations said the same from zero last year.

Around 49 percent of central banks expected gold reserves to be moderately lower five year from now in the 2024 survey, against 49 percent in 2023 and 38 percent in 2022.

About 13 percent of central banks surveyed said US dollar reserves would be significantly lower in the 2024 survey, up from 5 percent in 2023 and 4 percent in 2022. (Colombo/June18/2024)

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Sri Lanka rupee closes weaker at 304.75/305.40 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed weaker at 304.75/305.40 to the US dollar Tuesday, down from 304.15 to the US dollar Friday, dealer said, while some bond yields edged up.

Sri Lanka’s rupee has weakened amid unsterilized excess liquidity from earlier dollar purchases.

Excess liquidity fell from as high as 200 billion rupees, helped by some sales of maturing bills and also allowing some term contracts to run out.

However the central bank has started to inject liquidity again below its policy rate to suppress interest rates.

On Tuesday 30 billion rupees was printed overnight at an average yield of only 8.73 percent.

Separately another 25 billion rupees was printed till June 25 at 8.09 percent to 9.05 percent, which was still below overnight the policy rate of 9.5 percent.

Nobody has so far taken the central bank to court for printing money beyond overnight at rates lower than the overnight rate.

Sri Lanka operates an ad hoc exchange rate regime called ‘flexible exchange rate’ which triggers panic among market participants, as the central bank stays away when spikes in credit either creates import demand or unsterilized credit is used up.

“If large volumes of unsterilized liquidity is left, the exchange rate has to be closely defended to prevent speculation involving early covering of import bills and late selling of exports proceeds,” EN’s economic columnist Bellwether says.

“Just as an appreciating or stable exchange rate leads to late covering of import bills, a falling rates leads to immediate covering of import bills.

“Keeping exchange rates stable is a relatively simple exercise but it is difficult to do so if short term rates are also closely targeted with printed money, as liquidity runs out, as if the country had a free float and no reserve target.”

“When there is a large volume of excess liquidity remaining (except those voluntary deposited for long periods by risk averse banks) the the interest rates structure is under-stated compared to the reported reserves.

“Interest rates would be a little higher than seen in the market if the liquidity was mopped up and domestic credit and imports were blocked to prevent the reserves from being used up.”

In East Asia there is greater knowledge of central bank operational frameworks, though International Monetary Fund driven flawed doctrine are also threatening the monetary stability of those countries, critics say.

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Vietnam selling SBV bills to stabilize the Dong, as Sri Lanka rupee also weakens

Sri Lanka’s rupee started to collapse steeply after the IMF’s Second Amendment in 1978 along with many other countries as flawed operational frameworks gained ground without a credible anchor.

A bond maturing on 15.12.2026 closed at 10.10/30 percent up from 10.05/30 percent Friday.

A bond maturing on 15.10.2027 closed at 10.60/57 flat from 10.60/80 percent.

A bond maturing on 01.07.2028 closed at 11.15/35 percent, up from 11.05/20 percent.

A bond maturing on 15.09.2029 closed at 11.80/90 percent unchanged.

A bond maturing on 15.10.2030 closed at 11.90/12.00 percent.

A maturing on 10.12.2031 closed at 11.95/12.10 percent.

A bond maturing on 01.10.2032 closed at down at 11.95/12.10 percent, down from 12.00/10 percent. (Colombo/Jun14/2024)

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Sri Lanka’s Ceylon Chamber links up with Gujarat Chamber

ECONOMYNEXT – The Ceylon Chamber of Commerce has signed an agreement with the Southern Gujarat Chamber of Commerce and Industry (SGCCI) to increase trade cooperation between India and Sri Lanka.

The MOU was signed by CCC CEO Buwanekabahu Perera, SGCCI President Ramesh Vaghasia, in the presence of Dr Valsan Vethody, Consul General for Sri Lanka in Mumbai, India.

“With the signing of the MoU, … the Ceylon Chamber of Commerce and SGCCI aim to facilitate trade between the two countries via initiatives such as trade fairs and delegations, business networking events, training programmes,” the Ceylon Chamber said in a statement.

“This partnership will open doors for Sri Lankan businesses to explore opportunities in Surat’s dynamic market and enable the sharing of expertise and resources between the two regions.”

Established in 1940, SGCCI engages with over 12,000 members and indirect ties with more than 2,00,000 members via 150 associations. It promotes trade, commerce, and industry in South Gujarat.

The region’s commercial and economic centre Surat has risen to prominence as the global epicenter for diamond cutting and as India’s textile hub, and is ranked the world’s 4th fastest growing city with a GDP growth rate of 11.5%

Surat’s economic landscape is vibrant and diverse. As India’s 8th largest and Gujarat’s 2nd largest city, it boasts the highest average annual household income in the country.

The nearby Hazira Industrial Area hosts major corporations like Reliance, ESSAR, SHELL, and L&T. (Colombo/Jun18/2024)

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