FRONTIERS-Fast-disappearing treasuries the pick in Sri Lanka

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* Demand for debt surges after election

* Foreign holdings cap limits availability

* Outside investors selling out of stock market

By Shihar Aneez and C. Bryson Hull

COLOMBO, May 26 (BestGrowthStock) – When Sri Lanka’s 25-year civil
war ended last year, investors surged to its share market and
sent the index (.CSE: ) rocketing up 125 percent and making it
the top pick in global frontier investments.

So far this year, stocks are up around 25 percent, making
it Asia’s top gainer, but Sri Lankan government securities have
emerged as the hotter investment in the Indian Ocean country.

“The bond market is more liquid and foreign investors can
buy large volumes,” said Channa Amaratunge, director at CT
Capital.

“The valuation and price-to-earnings ratio compared to
other markets also have had an impact on foreign investments in
shares,” Amaratunge added.

The price-to-earnings multiple of Sri Lankan stocks now is
at more than 20, compared to around 11 in 2009. Analysts say
the figure is not supported by fundamentals, but rather local
speculators buying up shares.

The benchmark 91-day treasury bill yielded 8.13 percent at
an auction on May 19. In addition, the rupee currency is seen
likely to be firm or even appreciate slightly.

“We expect the rupee to have gradual appreciation into the
end of the year,” said Garvin Van Dort, head of trading at HSBC
Sri Lanka. He targets the 113.00/25 range by year’s end from
current levels of about 113.75/80.

“If we see more inflows of foreign direct investment or
inflows into the stock market, then obviously there could be a
case for a more aggressive appreciation,” he said.

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For a discussion on Sri Lanka’s political risk

click [ID:nRISKLK]

For Sri Lankan treasury securities benchmarks and data

click (LKBMK=: ) and (LKCMTBMK=: )

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Besides the end of the war, another positive factor for
investors came into place last month when President Mahinda
Rajapaksa’s ruling coalition won a resounding majority in
parliament three months after his own landslide re-election.

The stability the end of the political season brought has
re-ignited the debt market, which had already enticed foreign
investors after the country’s sovereign rating was raised last
year and it secured a $2.6 billion IMF loan.

However, government regulations that cap foreign investment
at 10 percent of all outstanding treasury securities are
proving a stumbling block.

“The bond market has picked up quite a bit from
pre-election. It’s just that because we are at or close to the
cap, there is not much available to meet that demand. That is
actually the only reason we are not seeing more funds flowing
in,” Van Dort said.

According to the central bank, only about $100 million
remains of the $1.9 billion available to foreign investors.

On the other hand, analysts and traders say the small
Colombo Stock Exchange, with a market capitalisation of about
$11 billion, still suffers from a lack of free float and high
volatility that makes it less attractive to foreign investment.

Foreign investors have sold a net 16.8 billion rupees
($147.8 million) worth of shares this year against net selling
of 789 million rupees last year, suggesting most were locking
in profits after correctly predicting the post-war boom.

NO RAISING CAP

Even though investors are keen for more treasury
securities, the government says it has as no plans to raise the
foreign holdings cap.

“From our debt market, what we want is to ensure the proper
safeguards for the country’s overall macroeconomic environment.
How much exposure can the country withstand?” P.B. Jayasundera,
secretary to the treasury and finance ministry, told Reuters.

Any appreciation in the rupee could hurt exports, which
made up 17 percent of the country’s GDP in 2009. However, the
$42 billion economy imports almost all its oil needs and an
appreciation could lower fuel prices.

“At the end what matters is how many volatile elements are
in the foreign exchange management, so as long as long-tenure,
secured investments are there, they are not vulnerable for
speculations,” Jayasundera said.

Sri Lanka may also consider a third Eurobond later this
year, after issuing two $500 million five-year Eurobonds, first
in 2007 (LK032736246=: ) and again last year (LK045930114=: ). Both
are trading well above their issue prices. [ID:nLDE61821I]

“From the country’s growth point of view, what we are
looking for is the money coming to the real economy and the
money coming in terms of a longer stay, not hot money or
speculative inflows,” Jayasundera said.

Stock Market

(Editing by Raju Gopalakrishnan)

FRONTIERS-Fast-disappearing treasuries the pick in Sri Lanka