Foreigners get 2-year hedge against forex risk on G-Sec investments

• Move aimed at reducing commercial borrowing and supporting rupee
• Will apply for new bond purchases between Rs.25mn and Rs.1bn

The foreigners who will invest in rupee bonds will get a forex risk cover up to two years from the Central Bank, as the government is working towards wooing dollar investments into Treasury bills and bonds, in a bid to lessen the reliance on commercial borrowings and supporting the currency. 

To this effect, the Cabinet of Ministers has approved a paper put forth, proposing to provide swaps of up to two years to the foreigners who will invest in rupee bonds. 

A fortnight ago, Finance State Minister Ajith Nivard Cabraal said in Parliament that the government intends to hedge the foreign exchange risk of foreigners via swaps, to provide some incentive to them to buy rupee bonds, as foreigners have continued to flee the rupee bond market since 2015. 

Coinciding with the statement by Cabraal, foreigners returned to the bond market, adding Rs.1.73 billion in the two weeks ended on September 16, as they successively purchased bonds to the tune of Rs.870 million and Rs.858 million in the two weeks. 

The foreigners who held Rs.453.3 billion or US $ 3.5 billion worth of government securities by January 7, 2015, slumped to Rs.11.8 billion by September 8, 2020, before gaining to Rs.13.5 billion by September 16.

However, if the trend would continue in the medium term is yet to be seen. 

Nevertheless, frontier market bonds such as rupee bonds provide a higher risk premium to foreign investors chasing for higher yields, as yields at the US and European markets hover at near zero or negative levels, since their central banks cut rates to provide monetary stimulus to their economies battered by the pandemic, by bringing down the borrowing costs drastically.
The Cabinet decision will be effective for new bond purchases between Rs.25 million and Rs.1.0 billion. 

Analysts say the decision to provide the forex cover is the right move in the right direction to woo back investors, as Sri Lanka has to resort to some innovative and unconventional strategies to win back investments and bring back high growth, which is sine qua non to enhance incomes and bring economic prosperity to a wider swath of people. Forex swap is a derivative used widely in cross-border transactions, to provide hedge against possible fluctuations in the exchange rate of a country against the currency of the other trading partner. 

Although the tourism industry generated US $ 3.5 billion in forex earnings in 2019, compared to nearly US $ 10 billion by the foreign employment industry, Arshad noted that the tourism industry was granted a significant amount of relief measures. 

“What we are requesting the government is to grant a six-month moratorium on loans and six-month working capital loans at 4 percent interest while extending the relief measures given to the tourism industry to us as well,” he said. 

In case the country’s foreign employment agencies were to go bankrupt, ALFEA Committee Member M.M. Thasleem cautioned that it could jeopardise the welfare of Sri Lanka’s migrant workers, as these agencies play a crucial role in resolving the issues faced by the migrant workers in their host countries. 

The ALFEA members pointed out that if not for the country’s foreign employment agencies, there would have been over 300,000 migrant workers forced to return to the country, as their employment contracts were to expire during the period, which could have exhausted the country’s healthcare sector. 

“Foreign employment agencies played a critical role in extending or renewing the work contracts of Sri Lankan migrant workers in Gulf countries, when the COVID-19 pandemic started to spread globally. The contract period of 300,000 to 350,000 migrant workers was to expire. However, we were able to negotiate their contracts with their respective employers successfully. Only around 50,000 of them are waiting to return to Sri Lanka now,” Thasleem elaborated. 

Further, the association warned that the country could face a US $ 11 billion shortfall in remittance inflows, over the next two years, as Sri Lankans leaving for overseas employment is expected to decline to 50,000 this year, compared to around 200,000 departures last year. 

According to the ALFEA, 40,000 Sri Lankans left for overseas employment, prior to the closure of Bandaranaike International Airport and they project further 10,000 departures before the end of this year. 

Hence, Arshad stressed that stabilisation of the country’s foreign employment agencies is crucial to promote and attract new businesses, to overcome the expected drastic reduction in departures this year.  

Meanwhile, he noted that the demand for foreign labour is recovering in Gulf countries and in Eastern Europe, which has become the latest destination for Sri Lankan migrant workers. However, the current COVID-19-related travel restrictions and quatrain measures as well high air fares have created a challenging environment for the industry.  

Despite the current challenges, the ALFEA members were optimistic that the foreign employment industry would be one of the first industries to recover, when the border-control measures are lifted. 

They also urged the newly-appointed Foreign Employment Promotions and Market Diversification State Minister Piyankara Jayaratne to look into trimming some regulatory red tape, which is not aligned with the ground realities and hinder the competitiveness of the country. 

With state support, the ALFEA members said they could potentially bring in US $ 15 billion foreign exchange inflows to the country.