Sri Lanka May Delay First Debt Sale, Investors Say

Sri Lanka May Delay First Debt Sale, Investors Say (Update2)

By Sam Nagarajan

Sept. 4 (Bloomberg) -- Sri Lanka may delay its first overseas debt offering as global credit markets slump and a conflict between government forces and Tamil rebels escalates, fund managers said.

``All bets are off in a situation where investors are generally looking to decrease risk in their portfolios,'' said Joel Kim, who manages the equivalent of $10 billion at ING Investment Management in Hong Kong. ``They need to wait for better market conditions.''

A delay to the $500 million sale would thwart the government's efforts to seek cheaper funding for building roads and ports, to revive an economy that expanded at the slowest pace in two years in the first quarter. The central bank has raised the benchmark interest rate seven times in the past two years to 10.5 percent from 8.25 percent to curb inflation, pushing up the cost of domestic financing.

Higher rates and the resumption in hostilities between government forces and Tamil rebels demanding a separate homeland have slowed expansion in the $26 billion economy. Growth decelerated to 6.1 percent in the three months ended March 31, the slowest in eight quarters, from 7.9 percent a year earlier.

``We are not deterred by the current market, and we are working toward our plan,'' central bank Governor Ajith Nivard Cabraal said in an interview. ``Conditions can change overnight.''

Emerging Markets

Sri Lanka, an island off India's south coast, had planned to sell the bonds as early as this month, the central bank said in a July 13 e-mail. Fitch Ratings Aug. 22 said government finances will be worsened by ``market turmoil'' triggered by U.S. mortgage defaults. Fitch rates the nation's long-term foreign- currency debt at BB-, three levels below investment grade.

Vietnam is reviewing plans for a $1 billion bond sale this month. The government needs to look at demand for emerging- market debt before making a final decision, Prime Minister Nguyen Tan Dung said on Aug. 13.

The spread, or extra yield, investors demand to own emerging-market bonds instead of U.S. Treasuries widened to 2.33 percentage points as of Aug. 30, from as low as 1.48 points on June 1, according to JPMorgan Chase & Co.'s EMBI Plus index.

Sri Lanka hired Barclays Capital, HSBC Holdings Plc and JPMorgan on Aug. 2 to help raise the money to upgrade the country's infrastructure. The debt sale will also serve as a benchmark for Sri Lankan companies raising money in international capital markets, the central bank said on July 13.

Tricky Timing

An overseas debt sale may help the government cut funding costs. The 10-year Sri Lankan local-currency bond yielded 18 percent, according to Colombo-based Commercial Bank of Ceylon Ltd. The yield on Vietnam's 6.875 percent dollar-denominated bond due in January 2016 has climbed to 6.47 percent from as low as 5.7 percent on May 2, 2007, data compiled by Bloomberg show.

The government wants the Liberation Tigers of Tamil Eelam to return to negotiations after two rounds of talks in Geneva last year failed to make progress. A 2002 cease-fire collapsed after only four years and more than 5,000 people have been killed since December 2005, according to Agence France-Presse.

Tourist arrivals fell 20 percent to 44,142 in July after rebels launched an air attack on oil and gas facilities near the capital Colombo.

``The timing of the sale is tricky for Sri Lanka,'' said Clifford Lau, who manages $7.6 billion of debt at Pramerica Fixed Income Asia Ltd. in Singapore. ``When there's a conflict, it is always unfavorable.''

Inflation Battle

Sri Lanka Telecom Ltd., the nation's biggest telephone company, raised $100 million in November 2004 in the first overseas debt offering by a company from the South Asian island.

``One must understand that Sri Lanka has never defaulted on its debt,'' said Lakshan Goonetilleke, investment banking manager at HSBC in Colombo. ``This sale will help contain local interest rates and moderate inflation.''

Investors are concerned Cabraal may fail in his aim to keep inflation within 10 percent because of increased military spending and rising crude oil prices. Inflation was 17.3 percent in August, close to a four-month high.

The government, in its budget for the current year, raised spending by 19 percent to 835 billion rupees ($7.4 billion) to help meet interest payments and pay salaries. Military spending surged 44 percent this year.

``The security situation remains a cause for concern and the macroeconomic environment is not encouraging, particularly in the light of the current global financial market turmoil,'' said Paul Rawkins, the London-based senior director of Fitch.

To contact the reporter on this story: Sam Nagarajan in New Delhi at samnagarajan@bloomberg.net .

Last Updated: September 4, 2007 00:34 EDT

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Edited September 4, 200718 yr by தயா