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Bond buyers burnt as Sri Lanka promise turns to political crisis

Former Sri Lankan President Mahinda Rajapaksa takes part in religious observances prior to assuming duties as the new Prime Minister at the Prime Minister’s office in Colombo, Sri Lanka 29 October 2018. His appointment has created a constitutional crisis. 10-year bonds issued at a juicy yield of 6.75 per cent earlier this year have slumped to less than 87 cents on the dollar.

[HONG KONG] When Sri Lanka offered 10-year bonds at a juicy yield of 6.75 per cent earlier this year, investors lapped them up. Lured by expectations for an economic recovery, asset managers put in orders for nearly three times the US$1.25 billion sold.

Six months later, the bonds have slumped to less than 87 cents on the dollar, as a leadership struggle plunged Sri Lanka into a constitutional crisis. The capital Colombo has been gripped by political intrigue since President Maithripala Sirisena suspended parliament and said he had to fire Prime Minister Ranil Wickremesinghe because of an assassination plot.

While Sri Lanka had been winning back investors following the end of a brutal 26-year civil war in 2009, new challenges had emerged even before the crisis, with economic growth falling to the least since 2001 last year. The sell-off is also fueling concerns over Sri Lanka's upcoming debt maturities, including US$1 billion of dollar bonds due January and another US$500 million in April.

"The timing of this political crisis is very poor" said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments, which is "underweight" on the nation's debt. "Sri Lanka clearly needs some external financing."

There is a "significant risk" as one administration transitions to another and investors will demand a risk premium, especially if the rhetoric is not market-friendly, Mr Lau said.

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The Sri Lankan rupee fell further on Tuesday to a record low of 174.3 against the dollar, following a warning the country could descend into political violence if the legislature remains suspended.

Uncertainty over future policy could hurt investor confidence, said Matthew Circosta, an analyst in the sovereign risk group at Moody's Investors Service in Singapore. This will undermine Sri Lanka's ability to refinance external debt at "affordable costs," he said.


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