Singapore, Mar 18, 2016 (LBO) – With Sri Lanka never defaulting on sovereign debt, rupee bonds were an attractive proposition within the bond offerings in Asia, presenters said at the Sri Lanka Investment Summit held in Singapore this week.
Although devaluation of the yuan, and increase in Fed rates led to capital outflows, those outflows appear to be stabilizing, Central Bank Governor Arjuna Mahendran told the audience.
The Sri Lankan bond market is trading at discount to regional peers after a foreign fund cut their exposure to the Sri Lankan market. Now there is an opportunity for investors to get in, market participants said.
“The higher yields are a response to those capital outflows, which now it seems are stabilizing. And we hope that stability will continue,” Mahendran said.
“My hunch is that as evidence mounts that the growth in bank lending results in a stronger supply side, then you will see a diminishing of those spreads, particularly as FDIs start coming in to the country.”
“The trigger really is getting the safety net from the International Monetary Fund,” he added.
But foreign investors worry about liquidity in the market. And the capital outflow, mainly due to Franklin Templeton cutting their exposure, led to a one-notch rating downgrade by Fitch.
“In frontier markets the dirty word is liquidity,” Ranjan Hulugalle, the chairman of Lanka Business Online said, moderating the session on Sri Lanka’s debt markets.
“But today we are not going to run away from it,” he said, posing the question on whether the Sri Lankan market offered liquidity to investors.
The bond market had double the value of Sri Lanka’s stock market, with much higher turnover and liquidity, according to Nirgunan Tiruchelvam, director research of Religare Capital Markets.
“Before 1977 there was no yield curve in the country. Since then there has been an extensive set of reforms that has created a vibrant market.”
As a frontier market, Sri Lanka also offers investors added benefits. Frontier markets have little correlation with US treasuries, and their risk-adjusted returns are superior to many other asset classes, said Thiruchelvam.
With seven-year bonds yielding 12 percent, and the one-year hedging cost at around 5.5 to 6 percent, investors would get a clean six percent return if bonds were held to maturity, Kasun Palisena, CEO of Perpetual Treasuries, noted.
There were added returns from trading opportunities, he said.
“What we do is we have a trading book. The volatility in the market always creates an opportunity for you to make capital gains,” Palisena said.
However, there is still a disconnect with the corporate debt market. Discussions were on with authorities to allow leveraging in the corporate debt market.
“Most of our clients are stock focused. When there is a shift of funds, they go into the banking system. One of the concerns I see is the corporate debt market,” said R. Muralidaran, managing director of Bartleet Religare Securities.
“The transaction cost is high, and there is no repoing facility available. If you were to allow the repoing activity then ofcourse the secondary market on corporate debt would be very active,” he said.
Palisena said government securities generated more liquidity after leveraging was allowed.
“The government securities market took off due to the leverage factor, because you can leverage up to 10 times of your capital,” he said.
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