Government bonds tumble amidst foreign reserve depletion

Sri Lanka is facing foreign reserve depletion with the repayment of USD 400 billion currency swap with India and no sign of impending foreign funding, eminent economic experts claimed.

According to a memorandum of financing in the Budget 2021 formulated by the Finance Ministry recently, the interest payments and capital repayment of Foreign Currency Banking Unit loans (FCBUs)  and Sri Lanka Development Bonds (SLDBs) are estimated at USD 2664 million.

During the year 2021, it is expected to raise USD 2000 million (LKR 376 billion) through the issuance of SLDBs, the memorandum disclosed.

In addition, USD 1170 million worth of FCBUs raised from the Bank of Ceylon and the People's Bank will matured this year and the Treasury will raise loans to repay it from the same channels.

The government will also be appealing for international investors to roll over bonds maturing this year, another sign of the island nation's grim financial situation  

Sri Lanka's government bonds tumbled on Tuesday (09) as warnings that the country was at increasing risk of default continued to mount after a few confused weeks in Colombo, Reuters news agency reported.

Sri Lanka's bonds due for repayment between 2022 and 2028 fell around 2 cents on the dollar, leaving those maturing beyond 2025 at roughly 60 cents or 40% below their face value and a level that signifies rising default fears, it said.

The government's failure to extend a USD 400 billion currency swap line with India last week and an apparent lack of appetite for a new deal with the International Monetary Fund has renewed worries its finances may not cover its upcoming debt bills.

Sri Lanka's FX reserves excluding gold stocks stood at just USD 5.2 billion at the end of December making its further depletion to USD 5.16 billion after the repayment of USD 400 million from foreign reserves.

Analysts at Morgan Stanley calculate it faces $4.6 billion worth of bond redemptions this year alone plus another USD 500 million payment in January 2022.

"Based on where current Sri Lankan bonds are trading, it would appear that markets are clearly factoring in the probability of maturity extension as well as the possibility of lowering of coupon rates," Morgan Stanley said.

Sri Lanka's Central Bank has repeatedly said it will honour all bond payments. Any delay or changes are usually classed as a default in the eyes of credit rating agencies.

Sri Lanka is in a comfortable position with regard to its debt repayment ability and will not default on its payments, State Minister for Finance Ajith Nivard Cabraal said.

Defending the ability to continue debt servicing, he said that the government was also negotiating with India for a USD 1 billion SWAP, which is in addition to the USD 400 million it received in July.

Sri Lanka will also receive USD 700 million as the second tranche of a USD 1.2 billion syndicated loan from the China Development Bank. The first USD 500 million was transferred in March this year.

The government will also revisit a USD 500 million Samurai Bond, which the Central Bank began laying the groundwork for in 2018, and possibly a Panda Bond as well, Minister Cabraal said.

A USD 1 billion repurchase arrangement with the US Federal Reserve, announced in July, also made the list.