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Sri Lanka shelves plan to buy back US$1.5 billion of sovereign bonds

COLOMBO : Sri Lanka's central bank said on Monday it will halt plans to buy back US$1.5 billion of its international sovereign bonds due for redemption next year because of a lack of interest from bond holders to sell at discounted prices.

This month, the central bank announced it would look to buy back international sovereign bonds (ISB) at discounted rates as part of a six-month road map to reduce short-term debt in a bid to boost investor confidence.

However, the bank said less than 5per cent of the US$500 million ISB that will mature in January was available for sale at the quoted discounted prices.

"It is clear that the large majority of ISB holders are not ready to part with the bonds unless prices are at par or closer to par. Hence, a buy-back initiative will also not result in any significant price or coupon benefit to the issuer," the central bank said in a statement. 

The island nation also has US$1 billion of bonds maturing in July with total debt repayment of about US$4.2 billion due in 2022.

"Lack of interest by investors to sell the bonds at discounted rates could be an investment decision to wait for a possible restructure of this debt, which an investor might consider likely to provide a higher return than selling it at the current discounted rates," said Trisha Peries, head of economic research at Frontier Research.

Peries pointed out higher bond prices after a restructuring had been the norm for several countries including Barbados, Argentina, Ecuador, and Mongolia, and investors could be expecting a similar situation to play out in Sri Lanka.

Sri Lanka's foreign exchange reserves stood at just US$2.58 billion at the end of September, while the rupee has depreciated 8.7per cent against the dollar this year. 

Investors will now focus on the outcome of a monetary policy review due to be announced on Thursday, when the central bank is expected to raise rates yet again to curb inflation and help contain pressure on account of the external debt crisis.

The government is due to announce its budget on Nov. 12, which will also be crucial in determining the country's fortunes in the short- to medium-term.

The foreign exchange crunch has triggered food shortages, with the government declaring a food emergency in August.

After weeks of wrangling with importers, government permission was granted over the weekend to increase prices on a slew of essential items including gas, cement, wheat flour, and milk powder.

"Most bond holders are Sri Lankan banks and since they know the terrain as insiders they are clearly a little bit more bullish than outside investors. So far, they are confident the government will pay up," said ICRA's head of research for Sri Lanka, Lalinda Sugathadasa.

(Editing by Swati Bhat and Kim Coghill)

Source: Reuters

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