SCB tips Lanka to revisit $ bond market; says IMF program will boost confidence

Despite the Government in its Budget 2013 indicating there will be zero foreign commercial borrowing, Standard Chartered Bank said yesterday Sri Lanka was likely to return to the US Dollar market and noted a fresh IMF program would boost confidence.

“We expect US$ 10.25 b of hard-currency issuance by Asian sovereigns in 2013 (slightly higher than 2012), with Indonesia and the Philippines dominating, as usual. Sri Lanka and Mongolia will likely revisit the US$ market. Issuance from Thailand and potentially Bangladesh could make the Asian space more interesting for investors,” Standard Chartered Bank (SCB) said in its latest credit alert on Asia titled ‘Asia sovereign credit comparator’.

Maintaining a stable credit outlook on Sri Lanka, SCB said Sri Lanka undertook various policy initiatives in early 2012 (abandoning the de facto currency peg, tightening monetary and credit policy), which helped to restore macroeconomic stability. Looking ahead, political stability will help the authorities to push through reforms, while gradual fiscal consolidation is underway.

“However, the current account deficit remains large and the external position could come under pressure given the country’s modest FX reserves and high external debt stock. While exports are unlikely to pick up and FDI flows will remain anaemic, a fresh round of IMF funding could help to stabilise the external situation,” it added.

“A new IMF program would improve investor sentiment and act as a positive catalyst for the bonds, as Sri Lanka relies on foreign borrowings to finance its large fiscal deficit,” the SCB Credit Alert said.

The SCB report also said it remains Underweight on the region’s high-beta sovereigns (Vietnam, Sri Lanka, Mongolia and Pakistan). “We expect the fundamental backdrop to remain challenging in the next six to 12 months, which could lead to volatility. We see the fair-value yield for Sri Lanka at 10-20bps over Vietnam and for Mongolia at 20-25bps over Sri Lanka on a duration-adjusted basis,” it added.

Though the SRILAN bonds quote wider than VIETNM, they appear fairly valued against global peers, SCB noted. “We think the SRILAN bonds should trade 10-20bps wide to VIETNM in yield terms on a duration-adjusted basis,” it added, though noting MONGOL bonds at current levels are still attractive and see fair value at 20-25bps over SRILAN in yield terms (the current differential between the MONGOL 22 and SRILAN 22 is 43bps).

See the detailed chapter on Sri Lanka in SCB’s Asia Credit Alert on Page 3