Author: Kim Iskyan

MILESTONES: SRI LANKA

By Kim Iskyan

It’s been a good run for Sri Lanka of late. In mid-July, all three major ratings agencies upped their views on the country, pointing to the ongoing recovery and broad economic stabilization.

300_regulars_milestones_2

Economic stabilization brings growing investor enthusiasm

Days later, Sri Lanka launched a $1 billion, 10-year bond at a price of 6.25%—down from price guidance of 6.5%. The issue, which the country’s central bank had originally intended to sell a month later but instead took advantage of positive market conditions to launch early, was more than seven times oversubscribed.

The deal priced 40 basis points cheaper than the sovereign’s most recent issuance in September 2010 and was Sri Lanka’s fourth dollar offering in global bond markets since 2007. The government said the proceeds of the issue would be used to pay down higher- priced debt and would be put toward post-war rebuilding and infrastructure in the country’s war-torn north and east.

Investors have good reason to be enthusiastic. Sri Lanka’s GDP moved up 8% in 2010, and forecasts are for a repeat of that figure this year. Inflation, which the IMF says will clock in at 7.9% in 2011, is high but well under control.

Foreign investment, particularly from China, is rising. Reflecting its increasing comfort with the economy’s trajectory, the IMF—which has a $2.5 billion stand-by agreement with the government—recently decided to shift from quarterly to semiannual reviews. Since the country’s 26-year civil war between the government and the separatist Tamil minority ended in May 2009, tourists are returning in droves. Per capita income has roughly doubled over the past five years, and the government is aiming to double it again by 2015.

But Sri Lanka still has a way to go. The budget deficit was between 8% and 10% in 2009 and 2010, and the debt-to-GDP ratio is north of 80%. Despite the recent improvement, Sri Lanka is still rated well below investment grade. After years of underinvestment and war, infrastructure is poor, which undercuts efforts to promote tourism as a growth industry. Investors, though, are clearly willing to give Sri Lanka the benefit of the doubt.