Sri Lanka Selling Global Bonds Amid Widening Budget Deficit

debtSri Lanka is selling global bonds for the second time this year as the government faces a wider budget deficit and a weaker currency.

The issuance is ranked B+ by Standard & Poor’s, its fourth-highest junk grade, and its size is yet to be decided, the ratings company said in a statement Tuesday. The sovereign is marketing 10-year notes and indicated it expects the securities to yield around 7 percent, according to a person familiar with the deal who isn’t authorized to speak publicly and asked not to be identified. The island nation sold $650 million of similar-maturity debt in May at a coupon of 6.125 percent.

This year’s budget shortfall may reach 6.9 percent of gross domestic product, compared with a target of 4.4 percent, amid higher expenses and legislative delays in approving tax proposals, Finance Minister Ravi Karunanayake said Oct. 19. Sri Lanka’s rupee has weakened 7 percent this year and reached an unprecedented 141.38 to the dollar this month after the central bank on Sept. 4 stopped daily intervention in the currency market to conserve foreign-exchange reserves.

“They would be going for the issue now to plug the budget gap with revenues falling short,” said Sanjeewa Fernando, a strategist at CT CLSA Securities in Colombo. “This will help bolster the currency, at least in the short term, and also ease pressure on interest rates.”

Pricing ‘High’

Finance Minister Karunanayake wasn’t immediately available for comment and government offices were shut for a holiday on Tuesday. Calls to the mobile phones of central bank Governor Arjuna Mahendran and Deputy Governor Nandalal Weerasinghe went unanswered.

The indicated pricing of the bond is “somewhat high,” CT CLSA’s Fernando said. The government could have borrowed at a cheaper rate under an International Monetary Fund program, but may have opted against it as the money would come with conditions attached.

Sri Lanka’s central bank kept interest rates unchanged for a sixth straight month in October and Governor Mahendran said the government will focus on boosting revenue in its budget due November. The Central Bank of Sri Lanka left its standing lending facility rate at 7.5 percent and standing deposit facility rate at 6 percent. Capital Economics predicts Sri Lanka will raise its lending rate to 8 percent in 2016. The economy grew 6.7 percent in April-June under a new calculation method.

Sri Lanka needs fiscal consolidation through increased revenue via measures in its 2016 budget to be announced next month, IMF mission chief Todd Schneider said in Colombo on Sept. 18. The nation must continue its commitment to exchange-rate flexibility, Schneider said while voicing concern about its deteriorating balance of payments.

“Sri Lanka’s external position remains vulnerable,” said Nicholas Yap, a Hong Kong-based credit analyst at Mitsubishi UFJ Securities (HK) Ltd. The 2015 current-account deficit is expected at 2.4 percent of GDP and foreign-exchange reserves are just enough to cover about 4 1/2 months of imports in the first half, he said. (Bloomberg)

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