Biznomics Note Pad 0 290

By Biznomics Research Team

Market Embraces Sri Lanka Sovereign Bond Issue

Sri Lanka raised USD 2.0 billion international sovereign bonds on the strength that IMF has endorsed the country’s economic performance, while the bonds having been rated by international rating agencies as “Non-Investment” grade. In fact Moodys attached “B2” rating while Standard and Poor’s and Fitch assigned “B” rating. The USD 500 million face value bond with 5-year maturity was raised at a semi-annual coupon rate of 6.35 percent while USD 1,500 million with 10-year maturity was raised with a semi-annual coupon rate of 7.55 percent. The Bonds were subscribed by 91 percent fund managers while 5 percent came from insurance and pension funds.

1

Sri Lanka entered in to the international bond market in 2007 and the June 2019 issue was the 14th USD benchmark offering. This was also the country’s second sovereign bond transaction this year. The Government of Si Lanka raised USD 1 billion 5-year bond at a semi-annual coupon rate of 6.85 percent and a 10-year bond at a semi-annual coupon rate of 7.85 percent in March 2019.

2

Sri Lanka has USD 17 billion ISBs as of June 2019 and account for nearly 50 percent of Government external debt.

Subscribe to BiZnomics magazine for full article

Leave a Reply

Your email address will not be published. Required fields are marked *

Changing Debt Profile of Sri Lanka 0 393

A Recent History

Over the recent past, the Sri Lankan general public has shown a great deal of interest in the subject of national debt. This has been due to expressions like the country’s “debt trap” and “debt crisis” used extensively in political debates and propaganda. The government in power as well as the opposition has blamed one another for bringing the country into such a debt trap or a debt crisis. A gripping fear of a possibility of debt default with all its adverse consequences has been widely generated. A generally accepted rule of thumb in measuring the gravity of a country’s debt problem has been to indicate the total outstanding debt as a ratio of the country’s GDP.

In this measure, the level of aggregated debt is related to a concept of total revenue generated during a financial year. Such national debt ratio can be considered equivalent to that of a corporate balance sheet ratio of debt to equity. Figure-1 captures the behavior of Sri Lanka’s Debt/GDP ratio during 2002-18. The data indicates that during key points in time, the debt levels have being significantly higher than what it is now. However, no one spoke of a debt crisis or debt trap at those times of high debt to GDP ratio – e.g. during the early 2000s. In fact, after 2004 the ratio has been generally below 100pct. In most years after 2004, the ratio was indeed below its current debt to GDP ratio of 83pct.

The total debt stock, as at 2018, remains at USD 73.7 billion. Of this the foreign currency debt is USD 36.4 billion – 49pct of total debt or 43.3pct of GDP. The remainder is LKR based debt stock. This is still manageable given that Sri Lanka can always roll over its existing LKR based debt without too much of a problem. The banking sector’s appetite for risk free assets is high and there are the captive sources like EPF and ETF. These indeed have been the natural long term players in debt markets.

Sri Lanka’s Shift to Commercial Borrowings

The portfolio of foreign currency loans is categorized into three sub sections, namely, a) concessional, b) non-concessional and c) commercial loans. Prior to 2013, 85pct of foreign borrowings was on concessional terms (see Figure-2). This has changed in 2009 with Sri Lanka successfully entering the international sovereign bond market in its debut. This also amounted to taking the pressure off domestic financing, which until then was the only source apart from donor funding that was available. The concessional external borrowings from multi-lateral agencies and bi-lateral funding sources have continued to be on a declining trend on a net basis since 2008.

Sri Lanka was pushed into international financial markets mainly due to the fact that concessional funding was not available after the country moved up to a lower ‘Middle Income’ country status from around 2004. In fact, IMF, IDA and the World Bank have taken Sri Lanka out of the “financially vulnerable” country status, on the grounds that the country as a ‘Middle Income Country’ has the ability to access international financial markets. Sri Lanka is not among the group of 37 ‘heavily indebted poor countries’ (HIPC), which are eligible for special assistance from the IMF and the World Bank.

As at 2018, Sri Lanka’s total foreign currency debt portfolio was USD 35.4 billion. Of this only USD 9.1 billion was obtained at commercial rates from financial market sources. The remainder is at concessional and non-concessional development funding rates. In other words 53pct of the foreign loans are commercial/non-concessional.

The foreign currency debt mix is dominated by USD borrowings given that our cash inflows from external revenue sources are also predominantly based in USD. This helps the country to manage any exchange rate volatility, as the matching of cash flows does not impact the debt servicing. In 2017, infact, 61pct of the total foreign debt portfolio comprised of USD, while the next largest was in SDR (20pct) followed by Yen loans (12pct) (Figure-3).

The bilateral debt component in Sri Lanka has contributed to modern infrastructure development much more than multilateral debt (i.e. WB). A closer examination of our foreign debt profile indicates that it has long term maturities. More than 75pct of the loan portfolio is maturing beyond 5 years (Figure-5). Market borrowings comprise only 39pct of the total. Refinancing of debt stock per se is not therefore, an issue. Debt servicing is the main concern.

External Debt Holders

The noise around the China debt trap too has found its resurgence since 2014. Given the investment into capital formation pursued by the then government, these investments were undertaken given the dilapidated and outdated infrastructure Sri Lanka had prior to the war ending. Therefore, such investments were paramount in order to create investor appetite for setting plants beyond the boundaries of the Western Province.

However, the data contradicts the China debt trap rhetoric created by politicians and non-academics as it is unsubstantiated and ill conceived; in fact the largest form of external debt is by way of International Bond issuances, while bilateral borrowings are from the ADB, World Bank, and Japan, while China comes in at 4th place (Figure-6). In this context what is important to understand is that all internal bonds are fungible and hence there is no financing risk but a mere cost of financing the stock of bonds.

Debt Servicing

Sri Lanka’s export earnings are one important source of cash flow which technically can be used to service the country’s current foreign debt. The higher the potential for foreign currency earnings through exports, the better it is. The country as potential lenders are unlikely then to be over-concerned about the borrower country’s capacity for repayment. International rating agencies would consider it good for Sri Lanka if our export earnings are growing on a year on year basis at a satisfactory rate. This also reduces the foreign exchange exposure attached with rupee based debt servicing.

Sri Lanka’s foreign currency denominated commercial debt as a percentage of exports, continued to show vulnerability as year on year growth of export earnings declined in 2009, 2012 and 2015. The volatility of our merchandise exports continue. The declines in export receipts (i.e. income) have added significant pressure on the ability to service foreign debt. This has made the cash flow conditions for foreign debt management per se challenging. The need is to secure USD cash flows/revenues from revenue generating activities and assets and / or cutting down USD import expenses further. This appears to be the path towards managing our ability to maintain this debt to equity mix.

Foreign Debt Servicing

The ratio of debt service ratio to merchandise exports is the ratio that gives us comfort on the ability to service our external debt payments (i.e. principal + interest). A country’s international finances are deemed healthier when this ratio is low and ranges between 10pct to 20pct. In other words, the lower the ratio the better, as it indicates that the country consumes less of export earnings to pay off its foreign debt. The ratio of total debt service payments to exports is therefore, an important measure of a country’s ability to service foreign currency loans/debt obligations. This ratio had remained well within the stipulated norms of 10pct-20pct from 2011 to 2015. The ratio has deteriorated, moving out of the applicable norm, from 2016reflecting the impact of bunching of repayments on medium term external debt. The decline of this ratio in 2018 reflects the impact of the rise in merchandise export revenues in that year.

By: Dr Kenneth De Zilwa

“Made in Sri Lanka” 0 653

Ever watch the movie, Rocky? I mean, any of those would suffice. But mainly, the original. In fact, if you know anything about Stallone’s life itself, you’ll know that he’s probably one of the biggest success stories in history. Now, there are plenty of famous people who failed but never gave up on their dreams. You can find them all throughout history. There sagas are powerful enough to make you second guess ever giving up in life.

Does the common idea of geniuses having an eccentric ideas and behaviors bear any truth? Here is a story of eccentric entrepreneur for you to decide.

People waste searching endlessly for magic, whereas to Lawrence Perera life itself is a magic. “I didn’t grow up around incredible cars or at a time where there was luxury. Few of my earliest and fondest memories involve automobiles. My story begins as kid who broke every toy car received just so that I could see how it was made. My mother noticed my passion for cars and decided that I should get into automobile engineering field and made me enter the German tech without waiting to go to the university, she was keen to see me making a career in the automobile industry’’ says Dr. Lawrence with a sense of gratitude, by starting his conversation with BiZnomics. “Just as we have moments in time crystallized by places, music or movies that imprint upon us, the automobile left an indelible impression on my experience and who I became”.

Now an Automobile Engineer by profession with over 40 years’ experience in the Automobile Engineering Industry both locally and overseas, Dr.Perera is a diploma holder in Automobile Engineering at the CGTTI, and Institute of Motor Industry of UK. He is also a certified automobile engineer in the Institute of Motor Industry and a fellow member of the Institute of Motor Industry – UK (FIMI).

‘’I know from very hard won experience that start-ups are enormously difficult and risky and chances are you might not succeed” says Dr. Lawrence Perera, Leading entrepreneur, Chairman and CEO of Micro Holdings and Micro Cars Ltd. Dr. Lawrence’s “ hard won experience’’ is based on manufacturing the car “Micro” the first designed , developed and manufactured car in Sri Lanka.

He has received extensive training with BMW, Volkswagen – Germany and Peugeot – France. Dr. Perera described his daily sightings of stranded people on the roads due to the chaotic situation of public transport and realized the crying need for a reliable alternative. ‘’I thought that if people had a reliable, economical, decent, comfortable and affordable car that would take them to the place they want to go, the problem would be solved and many man-hours would be saved. I then set to design and develop a small car with every household in mind – and that’s where MICRO started’’ he said.

Describing his product further he states: ‘’It was the tuk-tuk that influenced me to create a small car. The Morris Minor was the smallest at the time and the dimensions of my drawing were smaller. My product which was patented in 1999 was an 80% local manufacture. As far the brand name, I decided on micro mini and finally named it MICRO’’.

Dr. Lawrence Perera had been skeptical of the success of his product at the time it was launched at the price of LKR 300,000. ‘’ At that time local products were thought to be inferior but MICRO turned out to be acceptable and most bought it because it was economically priced’’. Marketing local brands had been very competitive as it was difficult to challenge and compete with international giants in the market.

The Micro was fitted with safety standards such as air bags and seat belts. Yet, Lawrence had to stop production mainly due to complicated manufacturing process and cost of production increasing.

The garment industry in Sri Lanka has made a big contribution to change people’s mentality in buying ‘made in Sri Lanka goods’. Garments sewn in Sri Lanka have earned in international reputation and Sri Lankan consumers are well aware of this fact. The government should encourage local products, and especially an industry such as automobile requires a certain tax relief for composite material used for making cars. Adding to this, He criticizes the industrial policy and taxation systems prevailing as not being friendly and conducive to local industrialist and manufactures. The Micro brand of which Sri Lanka could be proud of became well known the world over, even in countries such as Germany, China and Korea. But I could not develop Micro because support for the automobile industry is almost zero. For one thing vehicle importers were against local manufacture since their imports business would take a downward turn. And next, the industrial policy of the country and the taxation system does not provide any impetus at all. Although a normal car is not a luxury, but a necessity”. He claims that during the last four years, the company run with losses, and that the financing aspect has been terrible. The bank loan interest rate has shot up from 6.5% to 14.5%. p.a. “Business has been thrown into a quagmire”, he says and adds, “We have to pay much more than we earn”

Dr. Lawrence opines, that Sri Lanka has been in a miasma of uncertainty for a while, and that the combined effects of numerous policy changes have thrown many enterprises including the motor vehicle industry into turmoil, insists that the country should have strong decision-taking and unwavering leaders who will dispel personal gains and crack the whip to drive away corruption while instilling discipline in all sectors, in order that the country could emerge from one of its lowest phases in recent history with a record decline in business.

Dr. Lawrence Perera’s view is that gasoline engines will gradually go out of the market. He states that with the introduction of hybrid vehicles, gasoline engines changed, but that hybrids will survive only with combustion engines. ‘’whereas Japan went for the hybrid, China jumped into electric engines which will last for another 100 years. We should also adopt the electric car. With sunshine around all throughout the year, car solar batteries fitted to electric engines can be charged at no cost and what a saving on fuel that will be! Anyway, gasoline engines will gradually make its way out of the market, in not too distant future.

With the influx of hybrid and electronic cars an eco-environment challenge will be the lack of adequate provisions to dispose of used bittern such vehicles in the future. The lack of regulators for strict recycling and safe disposal of batteries will lead to them ending in garbage dumps. Another area that needs attention to curb pollution and improve and conserve of quantity is to adopt a long-term vision or polices of emission standards. The lack of the stable policy outlook may associate Sri Lanka with volatility and high risk.

Adding to his many innovative ‘firsts’, Dr. Lawrence Perera was the first to design an economical rail solution for the Sri Lanka Railway, in 2004, the first in Sri Lanka to assemble 4×4 SUVs under the technology transfer agreement with the Korean Ssang Yong motor company, with Mercedes technology in 2006, and the first to manufacture a luxury double decker bus with the latest technology complete with fully aluminium low floor monocaqne design for public transport in 2007. Commenting on his economical rail solution Dr. Perera says: “In 2004 I designed an economical rail solution termed ‘Lanka Econo Rail’ for mass transport to replace the car in the megapolis. My proposal was to build carriages using scrapped steel, with automatic doors, good seating and all comfort. My proposal envisaged buses at relevant stations to transport the passengers to their destination like the monorail or metro in foreign countries. It was a light-rail concept place of the heavy locomotive system which has been in operation for the past 164 years. However, this was blocked by railway officers who want the steel to be sold at dirt price by the kilo, as obsolete.

Dr.Perera attributes his success to his family – wife and two daughters who had been very supportive, without their support he wouldn’t have achieved so much. Dr.Perera is determined to showcase Sri Lanka’s potential in the international car industry.

By : T V Perera

Image Curtsey : Eranga Pilimatalawwe