Foreigners return to gilts after months accumulating close to Rs.2bn worth T-bills and bonds

Foreigners, who stayed away from rupee denominated government securities for months, have finally returned with some heavy buying.

During the two weeks to September 16, foreigners bought government securities worth Rs.1.73 billion during two successive weeks, bucking the seven-month streak of foreign capital flight from rupee bonds. 

According to data, for the weeks ended on September 9 and September 16, foreigners had accumulated government securities worth of Rs.870 million and Rs.857.77 million respectively.
If this could set off to a continued buying spree yet to be seen, the foreign holdings in government securities could strengthen the rupee. 

Sri Lanka’s rupee has lost 1.8 percent of its value against the US dollar year-to-date and the Central Bank is set to settle a billion dollar bond early next month.  

State Finance Minister Ajith Nivard Cabraal recently told parliament that the government intends providing some hedge against the foreign currency risk having to be borne by investors when buying rupee bonds. 

He said the government would offer swaps to cap the foreign exchange risk to re-draw the investors into rupee bonds. 

On January 07, 2015 foreigners held Rs.453.3 billion worth Treasury bills and bonds or just under US$ 3.5 billion, accounting for 11.36 percent of total outstanding stock of government securities.

At that time foreign holdings in rupee bonds were capped at 12 percent of total outstanding stock of Treasury bills and bonds. 

However, since then foreigners were seen shedding their holdings continuously and by November 6, 2019, just prior to the Presidential Election, they had only Rs.114.3 billion, just above 2.0 percent of total stock of government securities. 

Analysts cite confusing signals from the then government, low rates and the bond scam as the key reasons for this slump.

While the holdings briefly gained until the third week of January 2020 to Rs.114.45 billion, foreign holdings have since then been continuously on a downward spiral till such holdings hit Rs.11.8 billion on September 2, less than 0.2 percent of the total stock of outstanding government securities. While the last two week’s gain put the gilts held by foreigners at Rs.13.5 billion, it is still far from its January-end levels and miles away from its 2014 peak. 

The government intends to promote gilts to the foreigners to minimise the reliance on international capital markets, but foreign moneys on gilts is typically referred to as hot money as they could flee at any moment on the slightest negative signal or policy error or other global market developments, which are  completely out of control of the issuing country. 

Flight of such capital by huge amounts which can happen fairly quickly, could put economies in jeopardy as seen during the Asian financial crisis in 1997 and more recently during 2013 when the United States Federal Reserve indicated that they would start tapering off billions of dollars worth of stimulus deployed by way of buying bonds through printed money, which began in response to the global financial crisis in 2008 to support the economy, what was referred to as quantitative easing.