Colombo: Sri Lanka must come up with a plan to narrow its budget deficit as the top Asian issuer of sovereign dollar debt after China this year prepares to sell $3 billion of bonds annually.
The island-nation, which elected Gotabhaya Rajapaksa as its president last week, has to raise debt commercially to service earlier borrowings, Central Bank Senior Deputy Governor Nandalal Weerasinghe said.
“We need to have clear government policies that are aimed at maintaining access to capital markets,” Weerasinghe said in an interview in his office overlooking the Colombo port. “The rating agencies should see this as a viable proposition and a sustainable plan.”
Sri Lanka’s budget gap is set to widen to the most in four years after terror attacks in April robbed the nation of tourism revenue that fuels 5 per cent of the economy. The setback came on top of a cut in the nation’s rating deeper into junk by Moody’s Investors Service in November last year following a protracted leadership crisis.
“That’s what we have to aim for, to see an emerging trend where the fiscal is getting sharper and consolidation is taking place,” said Ajith Nivard Cabraal, a former central bank governor and economic adviser to President Rajapaksa.
Tourist arrivals to Sri Lanka, famous for whale-watching sites in Trincomalee, Buddhist temples in Kandy and pristine beaches, are down 21 per cent this year. The nation earned $4.4 billion from overseas visitors in 2018.
Sri Lanka in June sold $2 billion of sovereign debt at a yield 25 basis points lower than initial indicative coupon after raising $2.4 billion in an overseas bond sale in March to help boost reserves and repay debt. China, which is targeting to sell $6 billion of bonds, on Tuesday announced final price guidance for the debt.
Samurai Bonds
The nation also plans to sell 10-year bonds with a guarantee from the Japan Bank for International Cooperation. The central bank in October chose Mizuho Securities, SMBC Nikko Securities and Mitsubishi UFJ Morgan Stanley Securities to manage the sale equivalent of $500m.
“The Samurai has given us an opportunity to diversify the market,” Weerasinghe said. “Also, interest rates are more competitive compared with the dollar markets, even if you factor in the premium of conversion costs.”
President Rajapaksa appointed his brother Mahinda as the island’s new prime minister and finance minister. The two strongmen face an economy where growth slowed to a more than five-year low in the June quarter with debt level hovering at 83 per cent of GDP.
Gotabhaya has offered more subsidies for farmers and promised sweeping tax cuts as part of his plan to revive growth. That may further hurt the budget deficit.
The yield on Sri Lanka’s dollar bond due in 2030 declined 0.2 cents on the dollar to 99.4 cents as of 11:15am in Hong Kong, the lowest since early October.