Foreigners still in and out of rupee treasuries

What appeared to be a renewed interest in Sri Lankan treasuries by the foreigners at the start of the new year soon turned around in the subsequent week as they had offloaded more than what they purchased a week before after suffering virtually continuous selling during the back half of last year.

The data showed that the foreign bond funds and investors added 1,017 million rupee equivalent of rupee treasuries in the first week of January in what appeared as the start of a sustained growth in such investments.

However, in the subsequent week ended on January 11, they had offloaded Rs.5, 452 million worth of rupee treasuries, more than sharply reversing what they bought a week before.

This put the total foreign holdings in rupee treasury bills and bonds at Rs.113, 006 million from Rs.118, 458 million a week earlier.

Although referred to as ‘hot money’, the amount of treasuries held and added into the foreign investor holdings is one of the signs of rising optimism of the local economy by foreign investors.

The moneys coming into treasuries are called hot money because they can leave the country faster than they come if they see signs of economic weakness or any other external event which they think could have an impact on the economy they have invested in, leaving such countries into serious trouble when such money leaves, they leave en masse leaving a gaping hole in the Balance of Payment.

The Asian economic crisis during the 1990s was a classic example of how the flight of hot money brought East Asian countries such as Thailand, Malaysia, Philippines, Indonesia and South Korea into deep recession and sharp fall in the value of their currencies, similar to what Sri Lanka went through during the last two years.

Conversely, direct investments are opposite to money coming into treasuries of a country as they cannot be taken out easily or in the short term as they are invested in medium to long term projects such as building plants, technology or infrastructure.

Coming into 2024, the rupee treasuries saw mostly selling by the foreigners, particularly during the second half of last year after seeing a consistent growth during the first half.

For instance, foreigners who held 25, 572 million worth of rupee bonds by the end of December 2022 increased their holdings up to a notably high level of Rs. 188,984 billion by the end of June. However, thereafter they offloaded Rs.29,823 million worth of rupee bonds in the subsequent three months through the end of September and a further Rs.41,720 million worth of treasuries in the final three months of last year bringing the total rupee treasuries offloaded to Rs.71,543 million during the final six months.

With that outflow, the foreigners held Rs.117,441 million worth of rupee treasury bills and bonds by the close of 2023.

The still elevated US treasury yields which the foreigners could add to their portfolios at a virtually zero risk compared to what the rupee treasuries offer at a significantly higher risk could be perhaps why the foreigners are in and out of the rupee treasuries in the recent past and why they do not want to add more into frontier markets such as Sri Lanka as the country’s recovery remains still fragile.