Bonding with Bonds
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It was all about bonds — rhetoric or bonding–with-bonds talk in Parliament this week, with speakers from both the Government and the opposition lambasting the Central Bank for selling international bonds at high interest rates.
Much of the criticism came from a school teacher-turned-economist (Bandula Gunawardene), accountant-turned-politician (Ravi Karunanayake, whose pet hate – judging from the number of times he has pummelled this institution – is the Central Bank) and a veteran leftist politician (Vasudeva Nanayakkara).
The criticism was not surprising. And it was unsurprising too when I received a call from Seeni Bola, my banker friend (so named by friends after he once boasted that other banks were handling ‘seeni bola’ deposits compared to his bank!). He also once said that what money launderers were making in profit was just “seeni bola” returns compared to those involved in the infamous bond scam (now and then, also during the previous regime).
Karunanayake was quoted as saying that the Central Bank had recently issued a 10-year maturing sovereign bond at a high interest of 7.85 per cent “while Malaysia (3.87 per cent), Thailand (2.51 per cent), Vietnam (7.48 per cent), Greece (3.84 per cent) and Botswana (5.27 per cent), have issued at lower interest rates”. Gunawardene said that bond interest rates are much higher now than during the war years and Nanayakkara also raised similar issues.
“I say….…why are we raising sovereign bonds at such high interest rates?” asked Seeni Bola. “That’s because the Government has no choice other than seeking these bonds right now to pay off accumulating debt,” I replied.
“But at such high rates?” he queried. “Responding to the criticism, Minister Harsha de Silva has said that the rates went up owing to the political impasse, blamed on the current opposition, in November-December 2018,” I said.
We then discussed at length the issues surrounding the infamous bond scam for which the Central Bank is to shortly launch a forensic audit undertaken by BDO India LLP and KPMG Sri Lanka, and the country’s economic crisis and inconsistent policy formulation which are being blamed for deterring foreign investors.
Last week, Sri Lanka’s 13th international bond offering since 2007 of US$1 billion 5-year bonds and $1.4 billion of 10-year bonds was issued at 7.20 per cent and 8.20 per cent, respectively.
Interest rates indeed have been rising for the issuance of international bonds, according to figures provided by the Central Bank. While political turmoil impacts on foreign investor sentiment, which in turn triggers high interest rates, it appears that interest rates now and during the war years were almost at similar levels.
According to the Central Bank, the country has raised a total of $14.05 billion through the issuance of international bonds of both 5-year and 10-year periods, starting with the country’s debut international sovereign bond on October 18, 2007 which was $500 million at 8.25 per cent for five years.
Thereafter, the bank raised bonds as follows: on October 16, 2009 — $500 million at 7.4 per cent for five years; September 28, 2010 — $1 billion at 6.25 per cent for five years; July 21, 2011 — $1 billion at 6.25 per cent for 10 years; July 17, 2012 — $1 billion at 5.87 per cent for 10 years; January 7, 2014 — $1 billion at 6 per cent for five years; April 8, 2014 — $500 million at 5.12 per cent for five years; May 28, 2015 — $650 million at 6.12 per cent for 10 years; October 28, 2015 — $1.5 billion at .6.85 per cent for 10 years; May 5, 2017 — $1.5 billion at 6.20 per cent for 10 years; and April 12, 2018 — $1.25 billion at 6 per cent for 5 years and $1.25 billion at 7 per cent for 10 years.
From the above, it is clear that the Central Bank has had to offer bonds at a much higher rate to attract investors, a choice it doesn’t have since Sri Lanka’s accumulated debt is growing and owing to the bunching of debt payments, the country has to pay higher interest rates in 2019 through the sale of bonds.
According to officials, a total debt repayment of $5.9 billion is needed in 2019 of which $2.6 billion must be paid within the first three months of this year, while it has to raise some $20 billion over the next few years owing to the bunching of debt payments taken in recent times and during the previous regime.
Among other options the Central Bank would use to pay off debt are $400 million through a swap arrangement with the Reserve Bank of India and a $300 million loan from the State Bank of China, set to be increased to $1 billion. Arrangements are also underway to raise $1 billion more from swaps through Qatar’s Central Bank while the banking regulator has also expressed interest in the possibility of issuing Panda and Samurai bonds.
2019 is a crucial year with prospects increasing of a parliamentary poll, not due until mid-2020, being held before a presidential poll which must be conducted by December this year. The President last week hinted that a parliamentary poll would most likely be held before a presidential poll, a move which the ruling United National Party (UNP) alliance is not in agreement with. Add long-delayed, provincial council elections and 2019 is probably the year when the most number of elections is likely to be held in a single year.
This all means that the climate for investment becomes cloudy and uncertain which, in turn, would impact on the country ratings of sovereign bonds by international rating agencies and compel a hike in interest rates on future bond issues. Given that the Central Bank has to raise more international funds this year to pay off debt –- nearly $6 billion in total in 2019 — it would do so in a high-interest rate scenario.
Sri Lanka was offered a lifeline by the International Monetary Fund earlier this month by agreeing to extend the $1.5 billion loan programme by one year with the sixth tranche of the loan due shortly.
At this moment, as I was typing my copy, Kussi Amma Sera — relatively quiet today since her two friends have gone to their village for the monthly vacation — walks in with the cup of tea, saying: “Aney Mahattaya, mama danney neha bond gena. Pohora saha watura gatalu gena liyanna.”
I nodded my head in agreement empathising with her plight and that of rural folk where the bond scam and its aftermath mean nothing to a society, particularly the farming community, which is struggling to survive amidst falling prices for their crop, disease-infected crops, fertiliser prices and water issues.