An act of confidence in Sri Lanka

IF THERE was any surprise over the outcome of Sri Lanka’s debut US dollar denominated international bond issue, it was not it its successful subscription, which did not seem in doubt at any stage because of the country’s excellent record of debt settlement, which has been exemplary whatever government has been in office.

The surprise came in the volume of oversubscription, which was more than thrice the issue of US$ 500 million, with a subscription of US $ 1.6125 billion, amidst negative and adverse publicity campaigns by various quarters.

Speaking at the opening of the new Textile Export Complex at Thulhiriya on Thursday (19) President Mahinda Rajapaksa summed up the situation regarding this bond issue stating: “Private companies such as MAS Holdings coming together with the Government to rebuild and revitalize enterprises that have failed after privatisation, demonstrates well the expectations and trust such investors have placed in the development of the country.

“The validity of such trust is confirmed by the successful international bond issue for US $ 500 million that was closed on Thursday.

When for the first time the Government went to the international markets and launched a Sri Lankan bond issue for US $ 500 million, its oversubscription by over three times the issue on offer, in the face of the many obstacles, attempts at sabotage, false and harmful publicity and attempts to frighten investors, confirms the trust and confidence the international financial markets and foreign investors have in our Ten Year Vision for development.

Therefore, I honestly believe that the action of the investors in coming forward, despite some threats of not repaying debts, is a sign of the genuine expectations about the stability of this country and its future development.”

That the road shows by the Central Bank in association with the Joint Managers of the issue, JP Moran, HSBC and Barclay’s Capital and the Co-Manager Bank of Ceylon, had a favourable impact on the financial and investment markets in the world, despite what was at times well-orchestrated and at times misjudged adverse publicity, was evident from before the books were closed on the bond issue which showed that the impact of the inflow of bond proceeds will initially be felt in Sri Lanka’s Forex and Bond Markets.

The exchange rate has already begun to appreciate from the level of Rs. 113.48 per US$ to around Rs. 113.00 per US$. The Government securities market responded positively with lower yields on both Treasury Bills and Bonds.

The trading volumes in both markets also increased significantly. Foreign investors have shown keen interest to increase their participation in Sri Lanka’s Rupee denominated Treasury bonds, as well.

The overwhelming success in the bond issue came in the face of the jeremiads by some prophets of gloom and doom in the Opposition, particularly of the UNP. The oversubscription shows that Sri Lanka’s economic performance has been strong and resilient despite numerous material adverse shocks in recent years, particularly fuel prices, and negative sentiments expressed by the various financial and investment ratings announced for the country from the time was it first reported.

Central Bank

This was in keeping with the observations of the Governor of the Central Bank, Ajith Nivard Cabraal at a media presentation on the “Sri Lankan Economy on ‘Current Status and Prospects’ held on July 25, when he first announced the details of the international bond issue.

He said the country’s strong economic performance has been underpinned by strong domestic demand, steady growth in the export sector, a notable growth in remittances, and improved efficiency of financial intermediation; and that the macro-economic framework in Sri Lanka is conducive to sustainable levels of strong growth.

This was due to - Fiscal consolidation underway, which is the result of comprehensive improvements on both the revenue and expenditure sides; Lower public sector debt burdens and strong debt structure, which reduces the country’s vulnerability to confidence shocks; and, Counter-cyclical monetary policy aimed at combating inflation, in the context of ensuring sustainable growth.

It is the view of the Central Bank that the long standing resilience of the Sri Lankan economy and its sustainable growth was seen by its ability to face up to shocks such as the tsunami, the hikes in oil prices, terrorism, and continuing aspects of unfavourable weather conditions.

The Sri Lankan economy has been exposed to these shocks as much as many other countries of the world today. Also, the fundamental reason for continued growth of the Sri Lankan economy is attributed to the larger sections of the economy being owned and managed by the private sector.

As the Central Banks Governor said in July this year, the fact that the economic and financial variables in Sri Lanka were performing well amidst external shocks is seen by the strong GDP growth and growth in investments; the declining rate of unemployment; the improvement in fiscal performance; declining of Public Sector debt, and the healthy conditions prevailing in the banking sector.

The Sri Lankan economy has been growing at an average rate of 6 per cent since 2002, and the country has outperformed peers in the region, as well as countries with B and BB ratings, despite the fact that strong commodity prices have been a drag on, rather than an impetus to, growth, unlike other commodity producing countries.

Cabraal said: “We would like do even better since we would be the first to admit that we have a long way to go and have a greater challenge ahead of us. But, we are certainly not as bad as some my claim.”

He said it was important for Sri Lanka to do better by strengthening the Private Sector, ensuring the faster implementation of projects, particularly the many major development projects that were in the pipeline. The success of the bond issue now gives the Government the opportunity to fast-track the implementation of approved projects.

The net proceeds of the bond issue will be utilised by the Government to supplement available concessional funds to develop infrastructure projects that have been previously approved by the Government and included in the current 2007 Budget, including in areas such as electricity generation, water supply, roads, ports, roads and railways development, especially under the Mahinda Randora programme.

The success of Sri Lanka’s inaugural international sovereign bond issue will also help open the door for Sri Lankan corporate sector to tap the international markets.

Opposition campaign

The oversubscription of the Bond Issue by more than three times the offer was possible despite many attempts by sections the Opposition, especially the UNP and its leader to obstruct the issue; a vigorous publicity campaign against the issue and the nation both locally and abroad; with leading members of Ranil Wickremesinghe even threatening HSBC, one of the managers of the issue, with having its banking license cancelled if it went ahead with the issue, when a UNP government is next elected.

In the event, the overwhelming success of the bond issue with its oversubscription, would clearly indicate that the international investors were neither frightened nor chased away by the bogeys produced by Ranil Wickremesinghe and his supporters in the much divided UNP.

When considering the threat to cancel the banking licence of HSBC, when the UNP is elected to office, it is now evident that HSBC and other fund managers are not taking seriously the possibility of the UNP being elected to office any time soon, which is something Ranil Wickremesinghe and others in the UNP who organised protests outside the HSBC office in Colombo will have to chew on for some time.

The UNP and its two-member ally were targeting the bond issue for failure through its local and foreign manoeuvres for their plan to topple the Government in the forthcoming budget.

It was evident that they softened the campaign when it became clear that their campaign was not succeeding, and also that it was causing considerable dissension among the business community in Sri Lanka, which ranks among the UNP’s main supporters; as well as important observers of the Sri Lanka scene abroad who did not want Sri Lanka to be a country ranged against business and private investment.

It will take some time for the UNP to get over the troubles it has brought upon itself through this misjudged campaign against the bond issue, which has been solely motivated by the greed for power among its leadership.

The success of this bond issue is an instance when the Government too will have to act with caution in the utilising of the funds made available to Sri Lanka.

The success in gaining the confidence of the international investor community for this bond issue should be maintained for future success in Foreign Direct Investment and assistance for the larger development programmes of the Government.

The funds now obtained should be used solely for the purposes they were intended, as told to the investors. Any departure from this will be to the disadvantage of Sri Lanka when it becomes necessary to make other forays into the international investor market.