US-based frontier equity fund says its repatriations delayed up to a month on forex shortage

• Frontaura Global Frontier Fund exited its remaining position of 4% to Sri Lankan stocks this July 

A United States-based frontier market equity investment fund said it experienced up to more than a month delay in receiving its sales proceeds after it exited its positions in Sri Lanka’s equity market. 

Frontaura Global Frontier Fund, which held shares in Hatton National Bank PLC and LB Finance PLC, disposed its holdings on June 10 and July 02, respectively, with a gain of 16 percent or US $ 1.0 million because the fund managers became unsettled by the developing macroeconomic situation in the country, largely due to the pandemic-induced economic malaise. 

However, the fund, which faced no delays in repatriating its sales proceeds until June, started experiencing delays from up to three to six days in the case of June 10 sale and little over a month in respect of the last sale on July 02, with large variations in the exchange rate to that of the official exchange rate. 

“On June 09, we decided to exit our two positions in Sri Lanka for country macro reasons,” Frontaura Global said in its August monthly comment released to its stakeholders. 

“Our exit of final position, LB Finance, occurred July 02 but we did not receive all the USD until August 05.”  Frontaura Global said it withheld revealing the reasons for the exit until it received its money back. The fund said its exit was triggered by the brewing multiple, yet interrelated crises in the country’s currency, balance of payments, foreign reserves, fiscal deficit and debt levels, a scenario which they identified as a “classic emerging markets currency crisis”.  “We’ve seen this movie many times in different countries and the usual warning signs are flashing here,” it said. 

The fund noted that barring some extreme good fortune or bailout by a non-economic actor like China, it would be inevitable for Sri Lanka to avoid default on its foreign currency debt, which will accompany an International Monetary Fund (IMF) programme. 

“Authorities typically deny this up until the day they welcome the IMF’s financial assistance,” the fund said. 

While a typical IMF programme would entail austerity measures, the government this week indicated that it would resort to some form of austerity measures as pandemic-induced economic restrictions have erased a large section of the state revenues and crashed some key foreign exchange inflows. 

While Frontaura said the recent inflows via swap lines and the IMF’s Special Drawing Rights allocation would only provide temporary respite, “the foreign exchange window may slam shut at some point, possibly trapping foreign investors in the country for an extended time while their rupee investments depreciate”.