Investors wary of Sri Lanka debt repayment as country turns to bilateral aid

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Investors wary of Sri Lanka debt repayment as country turns to bilateral aid

Global investors are more skeptical that Sri Lanka will be able to repay its long-term debt as the island nation turns to bilateral aid to meet its obligations.

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The South Asian country's dollar bonds maturing toward the end of the decade are trading near record lows and default risk is near an all-time high, according to data compiled by Bloomberg. The first test would be a $1 billion maturity in July, which policy makers say they will repay in time after drawing down a swap facility from China to help meet a $500 million payment this week.

President Gotabaya Rajapaksa is looking to China and India for financial assistance, with the Pandemic slamming crucial tourism revenue and making it hard to pay for key food imports. Rajapaksa was loathe to go to the International Monetary Fund for a bailout, instead choosing to boost pay for state employees and soothe public anger as inflation accelerates.

Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments in Hong Kong said that while they should be able to repay debt from the FX reserve in July this year, this will certainly affect the repayment of debt later on. Talk of a meaningful bilateral financing arrangement does not seem sufficient right now. Sri Lanka's reserves stood at $3.1 billion last month. According to Fitch Ratings, the bonds repaid Tuesday and July are $6.9 billion external obligations for 2022, including $6.9 billion for external obligations.

The dollar-denominated notes maturing in March 2030 are trading at 48.95 cents on the dollar, close to the record low of 47.91 cents reached in May 2020. The stock market is expected to fall by 48.49 cents in March 2029, near its lowest price of 47.99 cents in more than a year.

In the last six months, losses in Sri Lankan bonds have risen by nearly 19%, the most among 10 sovereign emerging-market dollar bond markets in Asia, according to a JPMorgan Chase Co. index.

Ek Pon Tay, BNP Paribas Asset Management senior portfolio manager in Singapore, predicts that Sri Lanka will raise interest rates when it reviews policy Thursday. Three of six economists surveyed by Bloomberg expect no change, while the rest predict a tightening of at least 50 basis points. The island nation's inflation rate is among the fastest in Asia at more than 12%.

Tay said the country's ability to repay its July bond is less certain than in January. According to Nivedita Sunil, a fund manager at Lombard Odier, Sri Lanka will have to face an uphill battle to repay the debt. In a note this month, Citigroup Global Markets Inc. warned that there was a rising risk of a potentially disorderly default in Sri Lanka.

We have not held Sri Lankan debt for close to a year, troubled by the current-account developments - much weaker tourism and remittances than expected, weak economic growth and lack of commitment to an IMF program, which we would see as essential," said Matthew Vogel, London-based portfolio manager and head of sovereign research at FIM Partners.

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