CB to trim foreign holdings in Govt. securities

* Change would not be drastic - Deputy Governor

*  Investors have urged raising of limit

*  Cbank governor says limit unlikely to be raised

By Shihar Aneez

COLOMBO (Reuters) - Sri Lanka may consider cutting the foreign holding cap in government securities from the current 10 percent, after obtaining cheaper capital from other sources, the Central Bank’s deputy governor said on Thursday.

According to the Central Bank, it pays between 7.5 percent to 9.5 percent to foreign investors in government securities depending on the tenure. The Central Bank has maintained a 10 percent cap on foreign holding in both T-bills and T-bonds.

“We are beginning to feel that we can reduce it,” K.G.D.D. Dheeerasinghe, the senior Central Bank deputy governor told Reuters. “When we get from other sources, we will be in a more comfortable position to reduce it from 10 percent to say, 9 percent. We will not reduce it drastically.”

The island nation sold a $1 billion, 10-year bond at a coupon rate of 6.25 percent in September that was oversubscribed seven times, which also helped to boost the country’s reserves to over $7 billion.

Sri Lanka is in the process of easing strict foreign exchange controls to attract more inflows to boost the post-war economy.

That stands in contrast to the reaction of many developing economies, which have started to curb hot money coming in as the U.S. Federal Reserve on Wednesday announced a $600 billion bond buying plan that many fear will boost inflows.  

“We pay high rates on T-bills and T-bonds and that is also hot money unlike a 10-year bond, which is fixed and will not have a risk. But this money, it can come today and be pulled out tomorrow,” Dheerasinghe said.

“This happened to us last year. We don’t want to see the same risk. We are now more stable and we have more reserves.” Sri Lanka, before resorting to an IMF loan of $2.6 billion in July 2009, was facing a balance-of-payments crisis after foreign investors withdrew around $1 billion from government securities in the face of world’s financial crisis.

On Thursday, Ajith Nivard Cabraal, the Central Bank governor in Manila said Sri Lanka is unlikely to increase the 10 percent cap on foreign investment, despite a lot of outside requests for it.  

In the past, Central Bank officials have acknowledged that they cannot bring down T-bond and T-bill yields too much, which would make them less attractive to investors hungry for strong yields since the financial crisis began.

But the recent eurobond issue, Sri Lanka’s third entry into the international capital markets, has encouraged officials keen to cut the cost of servicing the government’s debt, which is presently at 86.2 percent of the gross domestic product.

Govt aims to boost FDI as outside funds come in

By Shihar Aneez and Ranga Sirilal

(Reuters) - Sri Lanka’s Board of Investment (BOI) on Thursday said it will prioritise approvals of investment into specific sectors as part of its thrust to revive the Indian Ocean nation’s economy after the end of a three-decade war.

Foreign investments into tourism, agriculture, fisheries, education, IT, outsourcing, infrastructure, ports and aviation will take precedence over all others.“For these particular sectors, we will give highest possible importance,” BOI spokesman Dilip Samarasinghe told Reuters.

“We want to develop these sectors.”

Projects in those sectors will be given priority over those in telecommunications, property development, garments, and manufacturing, which are already developed, he said.

Although Sri Lanka’s economic situation has turned around sharply since the end of a civil war in May 2009, foreign direct investment fell 16.8 percent in the first half of the year compared to the same period in 2009, when fighting raged.  

The government is already abolishing a BOI tax holiday of up to 20 years that was enjoyed by foreign investors during the war.

The International Monetary Fund, which loaned Sri Lanka $2.6 billion in July 2009, has urged an end to that subsidy. The government has also argued that advent of peace and the opportunities it offers are enough of an investment incentive.

Sri Lanka is starting to see some fund investment, albeit more slowly than expected, even though the Colombo Stock Exchange  has given Asia’s strongest return this year.

Most offshore investors have opted for the island nation’s treasury securities, a safe haven with a risk-free return of over 7.5 percent at the minimum. The stock market is deemed as too small and too illiquid by most outside investors.

Singapore-based private equity fund Calamander Group was first to launch a Sri Lanka-specific fund which aimed to invest a total of $75 million, primarily in local companies to turn them around for sale.

On Thursday, Dubai-based Heraymila Investments opened a brokerage house and said it is looking to invest up to 10 billion rupees ($89.6 million) in Sri Lanka to found a unit trust aiming to capture post-war growth potential.

In July, New York-based LR Global started an asset management unit in Sri Lanka with an initial investment of $20 million.