August 22, Colombo (LNW): Concerns are mounting among investors as Sri Lanka’s dollar bonds continue to decline, driven by uncertainty surrounding the country’s debt restructuring timeline and the potential impact of the approaching presidential election.
The bonds due in 2030 dipped below 55 cents on the dollar this week, marking a drop from 59 cents in mid-June.
This decline positions Sri Lanka as one of the worst-performing emerging markets in August, trailing only Lebanon.
In July, Sri Lanka reached a preliminary agreement with private investors to restructure $12.6 billion in bonds.
The arrangement requires approval from the International Monetary Fund (IMF) and major bilateral creditors, including China and France.
The Sri Lankan government has since requested further clarifications from the IMF regarding the restructuring plan, reflecting growing apprehension over the deal’s viability.
Analysts suggest that the uncertainty stems from both the timing of the proposed bond exchange and the political ambiguity surrounding the upcoming election.
Portfolio manager Carlos de Sousa from Vontobel Asset Management noted that Sri Lankan bonds have underperformed other distressed assets due to these uncertainties.
A Bloomberg index tracking Sri Lanka’s dollar bonds shows a 1.6% decline this month, although the bonds have gained 9.7% in value this year, surpassing the Bloomberg Emerging Markets Hard Currency Aggregate Index.
According to Junior Finance Minister Shehan Semasinghe, the government remains engaged in ongoing discussions regarding debt restructuring.
An initial assessment from the Official Creditor Committee has been received, but further information is awaited before finalising talks with bondholders.
The timeframe for concluding the agreement remains unspecified, heightening investor concerns.
The situation is further complicated by the looming presidential election on 21 September, where President Ranil Wickremesinghe seeks a renewed mandate amid ongoing economic recovery efforts following Sri Lanka’s 2022 debt default.
The IMF continues to review the proposed restructuring to ensure it aligns with the terms of the $3 billion loan granted to the country.
However, the debt deal faces scrutiny over concerns regarding equitable treatment of creditors. Bilateral lenders have traditionally been reluctant to disclose borrowing terms, adding to the complexity.
The restructuring plan currently includes a 28% nominal reduction in bond principal and provisions for macro-linked bonds tied to economic growth.
Analysts remain cautious about the possibility of a pre-election resolution. Barclays Plc analyst Avanti Save highlighted the limited window to finalise the deal, while portfolio manager Thys Louw from Ninety One UK Ltd. speculates that the agreement is unlikely to materialise before the election, signalling potential delays in the restructuring process.
