US$ 500m bond draws mixed reactions

Sri Lanka’s recent foray into the sale of a sovereign bond -- criticised by the opposition, but which was oversubscribed three times over -- has drawn mixed reactions from the business community.

“Whatever way you look at it and depends who you talk to -- it’s either a good boost for the government or a costly exercise to the country,” a senior, respected banker, who declined to be named, said. On his part, he believed the oversubscription meant “the international investor was confident in the Sri Lanka economy but was paying a higher price because the political risk is higher.”Explaining this, he said because of the United National Party’s opposition to the bond and fears that repayment could be a problem if interest rates rose to over 8 percent (when bonds like this may have attracted a rate of around 7 percent). “Having said that I believe this issue has shown that foreign investors are confident of Sri Lanka. However there is bound to be a debate on the good and bad side of this issue,” the senior banker said.

Other bankers agreed that the interest rate of over 8 percent for the US$ 500 million bond which raised offers of over US$ 1.2 billion came because the risk was higher. But they believe the interest in investing in a Sri Lankan bond was to do with a global investing community being flush with funds and looking out for secure investments rather than being confident in the economy or its performance.

“Sovereign bonds are always the most secure investment and offer fewer risks than other bond investments. Hence the interest here and the fact that there is a lot of money out there seeking investment avenues,” another Colombo banker said.

But he said the real concern is as to the purpose of this bond. “For foreign investors, it’s an investment and what it’s being used for is of no relevance. To them it’s the ability to recover their money with interest and in this case, Sri Lanka has an excellent debt repayment record – in fact the best in the region --, and on that score, investors have nothing to worry.”

Asked to comment on whether the UNP, if and when in power, would stop the repayments as announced, he said, “Everyone knows that despite what the UNP says it won’t keep to its word.” This was also a view expressed last week by Fitch Ratings.But bankers and economists agree with the opposition criticism that the bond is not for the stated reasons like financing infrastructure development projects. “If it was for this reason, the government would have easily gone in for cheaper credit (ADB, etc) at 1-2 percent or even less. Here we are paying 8 percent in a short term (five years). That’s a huge cost to the people and something stinks in what the government is saying,” the Colombo banker said.

Media analysts said one of the problems in analysing politically-sensitive issues like this was that commentators from the political, business, economic or banking sectors were often polarised on political lines. “They are either reflecting a pro-government view or a pro-UNP view and speak with some kind of bias and often don’t come up with a rational or unbiased view on national issues,” one analyst said. “So its difficult to get an independent comment.” HSBC, J.P. Morgan and Barclays were the lead managers for the issue.