New bond issue offers value

Money 2Ceylon/serendib is a teardrop-shaped island in the Indian Ocean that has enthralled me ever since I visited the hill resorts of Nuwara Eliya and the exquisite ruins of Anuradhapura as a boy. The tragic, terrible civil war against the Tamil Tigers (1983-2009), the Asian tsunami (2004) and the 10-year autocratic “family business” rule of ex-President Mahinda Rajapaksa were a nightmare for Sri Lanka. Yet Sri Lanka’s political transformation has not been rewarded by the financial markets.

In January 2015, President Sirisena has replaced the pro-China Rajapaksa clan and marginalized them with a victory in the August 2015 parliamentary election. Sri Lanka finally has a government committed to democratic principles, privatisation and economic reform (Colombo as the Indian Ocean’s new Dubai and Singapore? Why not?) reconciliation with the Tamil ethnic minority after the human rights trauma in Jaffna when the military vanquished the LTTE in 2009 and killed Velupillai Prabhakaran.

Sri Lanka’s economy, reliant on tourism, tea exports, a construction boom, services and remittance from its diaspora in the Middle East, delivered annual 6.5 per cent growth between 2002 and 2015, despite the civil war, tsunami, foreign debt crises, terror attacks and political vendettas among the elite. GDP growth in 2015 will not meet the finance ministry’s 7.5 per cent target due to a shrinkage in world trade; Sri Lanka could well deliver 6.5 per cent growth.

The new government has also slowed Rajapaksa’s Beijing-financed infrastructure and vanity white-elephant projects as it launches probes into the endemic corruption of his decade in power. While the rupee has sagged seven per cent against King Dollar and the oil crash will hit Gulf remittance flows, growth will be boosted by a fall in interest rates, export competitiveness and robust consumer spending. Sirisena’s South African-style Truth and Reconciliation Committee can help heal the wounds of the past and attract Washington/London since the UN has applauded the initiative. Sri Lanka also plans constitutional reforms to reduce the power of the executive and empower the legislature so that the arbitrary, corrupt political culture of the Rajapaksa era never again reappears.

This $80 billion economy will be the next Asian frontier Tiger since I believe the Indian Ocean will replace the North Atlantic and the Med as the focal point of Great Power rivalries in the next decade. Prime Minister Ranil Wickramasinghe’s state visit to Japan has elicited the promise of concessional loans and Sri Lanka, which has never defaulted on its external debt even during the civil war, has established an impeccable reputation as a sovereign issuer in the Eurobond markets since the victory over the LTTE in 2009.

Sri Lanka issued a $1.5 billion 10-year sovereign bond that paid a rich 6.875 per cent US dollar coupon in October. This bond was widely allocated to US/Europe-based emerging markets funds since only seven per cent of the new issue was given to pension funds, insurance companies and private banks. Yet emerging debt funds were desperate to sell bonds en masse as investors redeemed out of the high-yield-debt asset class after the Chinese yuan, Third Avenue and Lucidus Capital shocks. So the Sri Lankan new-issue bonds have fallen to 93.50 to yield a stellar 8.3 per cent and enable leveraged investors to lock in a 15 per cent annual US dollar return. I do not want to gloss over Sri Lanka’s financial risk metrics; Standard & Poor’s rates Sri Lanka as only a B+ credit, while Moodys is B1.

Foreign exchange reserves fell from a peak of $9 billion in 2014 to below $7 billion, forcing the central bank of Sri Lanka to negotiate a $1 billion currency swap line with the Reserve Bank of India. There is no way the government will meet the Finance Minister’s target of a 4.4 per cent budget deficit and debt/GDP ratios are still too high at 72 per cent. Yet like Benigno Aquino’s Philippines, I believe Sri Lanka is on the path to at least two sovereign credit upgrades if it can implement its reform agenda now that it dominates Parliament. Sri Lanka, like Northern Ireland and Bosnia in the late-1990s, is a beacon of hope for all of us who are disgusted by ethnic/sectarian hate in the global human family.

Despite the 2010-11 market bubbles, Sri Lanka’s “peace dividend” is not yet reflected in its international bond. The terror threats in the Sinai and Bodrum/Antalya will benefit Russian tourist arrivals. Bank loan growth will boost valuations. The Colombo Port project can well attract $10 billion in FDI, as can Jaffna’s reconstruction. My dream? Sri Lanka as an investment grade credit one day! (Khaleej Times)

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