Investors are placing bets that Sri Lanka will receive final IMF approval for a $2.9 billion bailout on Monday. It would be crucial in helping the insolvent country recover from its worst economic crisis in decades.
The Best-Performing Bonds in Recent Months
The best-performing dollar bonds this year, the South Asian country’s bonds have returned 20%. This month, local currency increased by 8%, and stocks increased by 5%. They are outperforming their Asian counterparts as investors anticipated the trickle-down of billions of dollars in financing. While the CSE All-share index dropped more than 30% in 2022, the rupee plunged by 45% last year.
Money is essential to bringing stability and debt sustainability to a struggling economy. Through 2022, there would be severe shortages of necessities like fuel and medications, fueling Asia’s fastest inflation and depleting resources.
After defaulting on its dollar debt in May, Sri Lanka has taken drastic steps to stabilize its economy, including slashing subsidies, hiking taxes, and letting go of its tight control over the rupee. It also brought about the most significant rise in borrowing costs since 2001.
Sri Lanka also acquired debt assurances from foreign creditors like India, China and other countries out there. Their funding is going to help Sri Lanka in such tough times immensely.
The dollar amount of debt due in 2030 has increased from 21 cents in November to almost 36 cents. According to Bloomberg, the IMF rescue will contribute to maintaining bond prices at current levels; further gains would depend on how successfully the country raises revenue.
Debt Talks
On the assumption that a bailout would provide access to more cash to stabilize the country’s finances, foreign investors are also anticipated to increase their holdings of Sri Lanka’s government bonds. Bingumal Thewarathanthri, the chief executive of Standard Chartered Plc, Sri Lanka, said, “You can’t wait until the debt restructuring is over; after that, the price points would be pretty different”.
The island country has a lengthy history of working with the IMF. Since the 1960s, it has obtained 16 bailouts, the most recent being in 2016. The Washington-based lender makes payments during the program and by reviews; an initial sum is released following board approval.
Next, attention will turn to the debt negotiations, which, according to Fitch Ratings, might take a while as creditors argue over whether to include local-currency sovereign borrowings in the restructuring. In December, the rating agency reduced its rating for rupee debt because it thought a default was likely.
According to senior economist Patrick Curran, Tellimer anticipates the recovery value of bonds of Sri Lanka to be about 40 cents, with some room for growth given the country’s debt reduction goals.
There are some indications of a reversal in Sri Lanka. In four months leading up to February, reserves recovered 29% to $2.2 billion, inflation is decreasing, and there are no longer any daily power outages.
