No loan default; China swap a confidence booster: Stockbroker

• Says US $ 1.5bn currency swap with China will give significant boost to local and foreign investor sentiment 
• Points out that yields on short-end of Lankan ISBs curve plunged in response to news, which indicates greater confidence
• Says bilateral and multilateral financing will be more practical near-term substitutes to an IMF lending programme

In a report issued yesterday, the research arm of leading independent investment banking firm Asia Securities reiterated that it does not see a risk of sovereign default at this point. 

According to the report, the eagerly anticipated announcement of the US $ 1.5 billion currency swap agreement with China this week is expected to provide a significant boost to local and foreign investor sentiment. 

It further pointed out that following the news, yields on the short-end of the International Sovereign Bond (ISB) curve plunged in response (implying a rise in bond prices), indicating greater confidence of the international market in the Government of Sri Lanka’s ability to honour its debt obligations. 

The US $ 1.5 billion swap is a much-needed boost for the reserves position that stood at US $ 4.6 billion by end-February. 

The report further forecasted that in 2021, the estimated capital account inflows (not including any potential investments into Port City) should exceed the outflows in the capital account. The yield on the government sovereign bond maturing in July this year dropped by over 20 percentage points, in secondary trading, to 14.56 percent on March 11. 

Asia Securities Research further stated that the announced finalisation of this swap agreement opens up the possibility of further bilateral financing arrangements that could be successfully negotiated by the government in 2Q 2021 onwards.  

Reflecting on the report, Asia Securities Chairman Dumith Fernando stated, “Against the backdrop of COVID-19 recovery, we see bilateral and multilateral financing to be more practical near-term substitutes to an IMF lending programme.” 

“Contrary to the widely expressed opinions by international firms, in my view, a conditional IMF programme may not provide the counter-cyclical growth runway that Sri Lanka needs right now,” he added.

Fernando further stated, “As fiscal space remains constrained to practically meet the performance target of an IMF agreement, inflows through a customised approach would be more suited for Sri Lanka in turn, enabling a more deliberate growth agenda. An IMF programme coupled with further structural reform would be more viable at a future time once the entire world has moved beyond some of its near-term headwinds.”