Lankan sovereigns will underperform in 2013 - Report

The emerging high-beta sovereigns of Sri Lanka are expected to underperform over the next 6-12 months, said a leading global banking group, while maintaining a ‘stable’ outlook on most Asian sovereigns, adding that ‘positive’ rating momentum however has largely subsided.

“We maintain a cautious view on these sovereigns and recommend an ‘Underweight’ position in them, as we expect the fundamental backdrop to remain trying over the next 6 to 12 months,” stated Standard Chartered Bank (SCB), releasing its Credit Alert in January.

The other Asian peers whose sovereigns are expected to underperform are Vietnam, Mongolia and Pakistan.

SCB further sees the fair value yield for Sri Lanka at 10 to 20 basis points over Vietnam and for Mongolia at 20 to 25 basis points over Sri Lanka on a duration adjusted basis.

Meanwhile, the Central Bank Governor Ajith Novard Cabraal is reported to have said last week the country would not go for a sovereign issue this year. However, SCB is of the view that Sri Lanka is likely to revisit the US dollar bond market in 2013.

The report however opined that a new I nternational Monetary Fund programme would improve investor sentiment and act as a positive catalyst for the bonds, as Sri Lanka relies on foreign borrowings to finance its large fiscal deficit.

Nevertheless, the Credit Alert acknowledged Sri Lankan sovereigns performed well in terms of valuation in 2012 in line with the broader market. “The low amount of Asian sovereign issuance, investors’ search for yield and the gradual shift in allocation by global funds to emerging markets sovereigns should support this space.”

Since the maiden US$ 500 million, five-year sovereign bond issue at a yield of 8.25 percent in 2007, Sri Lanka went to the international capital market four times with another US$ 500 million at 7.5 percent (2009), followed by two issues of 10-year US$ 1 billion tranches in 2010 and 2011 at 6.25 percent respectively.

The latest issue of 10-year US$ 1 billion was made in July last year of which, part of the proceeds was used to repay the maturing US$ 500 million bond in October. The issue was made at a cost of 5.875 percent with an oversubscription of 10 times, which according to the Central Bank demonstrates the growing international investor confidence on the country.