- Says swap conclusion a confidence booster
Asia Securities yesterday reiterated that it did not see a risk of sovereign default at this point.
“The eagerly-anticipated announcement of the $ 1.5 b currency swap agreement with China this week is expected to provide a significant boost to local and foreign investor sentiment,” said the research arm of leading independent investment banking firm.
Following the news, yields on the short-end of the International Sovereign Bond (ISB) curve plunged in response (implying a rise in bond prices) indicating greater confidence of the international market in the Government of Sri Lanka’s ability to honour its debt obligations.
The $ 1.5 b swap is a much-needed boost for the reserves position which stood at $ 4.6 b by end February. The report further forecasts that, in 2021, estimated capital account inflows (not including any potential investments into Port City) should exceed outflows in the capital account. The yield on the Government sovereign bond maturing in July this year dropped by over 20 percentage points, in secondary trading, to 14.56% on 11 March.
Asia Securities Research further stated that the announced finalisation of this swap agreement opens up the possibility of further bilateral financing arrangements that could be successfully negotiated by the Government in 2Q 2021 onwards.
Reflecting on the report, Asia Securities Chairman Dumith Fernando stated: “Against the backdrop of COVID-19 recovery, we see bilateral and multilateral financing to be more practical near-term substitutes to an IMF lending program. Contrary to widely expressed opinions by international firms, in my view, a conditional IMF program may not provide the counter-cyclical growth runway that Sri Lanka needs right now.”
He further stated: “As fiscal space remains constrained to practically meet performance target of an IMF agreement, inflows through a customised approach would be more suited for Sri Lanka in turn enabling a more deliberate growth agenda. An IMF program coupled with further structural reform would be more viable at a future time once the entire world has moved beyond some of its near-term headwinds.”