Sri Lankan Bonds are Attracting Increased Interest from Global Investors

25th September 2009, www.bloomberg.com

Sri Lankan bonds are attracting increased interest from global investors as the government focuses on economic development after the end of the three - decade civil war, said Foreign Minister Rohitha Bogollagama.

“It’s our priority to make use after the long struggle and effort into meaningful economic development,” he said in an interview at the Asia Society in New York.

The army’s victory over the Liberation Tigers of Tamil Eelam in May has prompted economists to boost their growth forecasts and spurred a rally in stocks, making the island’s Colombo All-Share Index the best performer in Asia this year.

The International Monetary Fund said this week it expects Sri Lanka’s gross domestic product to rise 3.5 percent in 2009, more than a July estimate of 3 percent. The $41 billion economy is showing signs of “bottoming out,” said Brian Aitken, the IMF’s Mission Chief for Sri Lanka. Growth accelerated to 2.1 percent in the second quarter from 1.5 percent in the first three months of the year, the government reported Sept. 14.

“The conclusion of the civil war should increase foreign direct investment in areas where Sri Lanka is strong, such as tourism, garments and tea, but also more broadly in other sectors of the economy,” said Ashok Parameswaran, senior emerging markets analyst at Invesco Inc. in New York. “For the government to really take advantage of the civil war’s end, it must take steps to improve the investment environment by reducing red tape and improving contract enforcement.”

Dollar Bond Sale

Sri Lanka’s October 2012 dollar bond yielded 7.505 percent as of 10:30 a.m. in Singapore, according to the Royal Bank of Scotland Group Plc. The yield fell nine basis points yesterday, narrowing the spread with similar-maturity U.S. Treasuries to 6.1 percentage points. The notes were first sold to yield 8.25 percent in 2007, or 3.97 points more than Treasuries.

The island nation is increasing foreign trade and investment and has sold dollar-denominated sovereign bonds in overseas markets to help fund reconstruction. A $500 million debt issue is “attracting lots of investors,” Bogollagama said.

The country is also receiving aid from the IMF to help avert a balance of payments crisis after foreign-exchange reserves fell to an eight-year low of $1.27 billion in March.

The IMF said on Sept. 22 it’s “cautiously positive” on the nation’s prospects as it reviews the economy for the release of a second payment in its $2.6 billion aid package. Sri Lanka has received a first payment of $322 million and may get the second part in November, Bogollagama said.

Stock Rally

The South Asian country’s Colombo All-Share Index has gained 92 percent so far this year. The index was the region’s third-worst performer in the past two years as record spending on defense strained public finances.

The stock market’s rally is a sign of Sri Lanka’s “very vibrant economy” and shows investors’ confidence in the country, Bogollagama said.

Sri Lankan stocks may offer better returns as the end of the civil war frees up government spending for investments in infrastructure and agriculture, investor Jim Rogers said last month.