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| Foreign traders view Sri Lanka as a good place to invest, especially in government bonds |
Sri Lanka’s debut foray into the sale of international sovereign bonds has drawn significant interest from overseas investors, attracting $1.25 billion of orders for a $500 million bond offering, according to an e-mail sent to investors.
The Sri Lankan government Thursday trumpeted the over-subscription of its controversial bond for USD500 million as a firm vote of confidence in the resilience of the island's war-torn economy.
The President's Office had said in a press release that the bond was over-subscribed three times when the bids closed last Wednesday.
Forty per cent of the investors were from the US, while Europe, Middle East and Asia accounted for 30% each, the Hindustan Times reported.
The press release claimed that international investors were clearly impressed with Sri Lanka's 7.4% growth in 2006, despite the fuel price shock, adverse weather conditions and the continuing war.
“Whatever way you look at it and depends who you talk to -- it’s either a good boost for the government or a costly exercise to the country,” a senior, respected banker, who declined to be named, told the Sunday Times.
On his part, he believed the oversubscription meant “the international investor was confident in the Sri Lanka economy but was paying a higher price because the political risk is higher.”
Explaining this, he said because of the United National Party’s (UNP) opposition to the bond and fears that repayment could be a problem if interest rates rose to over 8 percent (when bonds like this may have attracted a rate of around 7 percent).
The main opposition UNP had criticized the bond as being an expensive way to raise funds and even threatened that it would cancel the issue if it came to power.
“Having said that I believe this issue has shown that foreign investors are confident of Sri Lanka. However there is bound to be a debate on the good and bad side of this issue,” the senior banker told the Sunday paper.
Other bankers agreed that the interest rate of over 8 percent for the US$ 500 million bond which raised offers of over US$ 1.2 billion came because the risk was higher, the Sunday Times reported.
"The bond carries 8.5% interest over a five year period which is the costliest loan that the Sri Lankan state has ever taken in its history. The subscribers have got a very good deal even as it shows how desperate the government has been to get money," Dr Harsha de Silva of the Colombo-based think tank LIRNE ASIA told Hindustan Times.
Dr de Silva and other critics, including the opposition UNP, wonder if the expensive money, got in such a hurry, was meant to tide over the cash crunch the government was facing, to meet the budget deficit, or finance the ever escalating war in the North and East, the Hindustan Times reported.
Bankers and economists agree with the opposition criticism that the bond is not for the stated reasons like financing infrastructure development projects, the Sunday Times added.
“If it was for this reason, the government would have easily gone in for cheaper credit (ADB, etc) at 1-2 percent or even less. Here we are paying 8 percent in a short term (five years). That’s a huge cost to the people and something stinks in what the government is saying,” a Colombo banker was quoted by the Sunday Times as saying.
Sri Lanka’s defense expenditure is to go up from SLRs 139 billion ($ 1.27 bn) in 2007 to SLRs.166 billion ($ 1.46 bn) in 2008, and the inflation rate is currently at 17.5%.
“Everyone knows that despite what the UNP says it won’t keep to its word,” another banker, asked to comment on whether the UNP, if and when in power, would stop the repayments as announced, told the Sunday Times.
This was also a view expressed earlier by Fitch Ratings.
Media analysts said one of the problems in analysing politically-sensitive issues like this was that commentators from the political, business, economic or banking sectors were often polarised on political lines.
“They are either reflecting a pro-government view or a pro-UNP view and speak with some kind of bias and often don’t come up with a rational or unbiased view on national issues,” one analyst said. “So it’s difficult to get an independent comment.”
