July 27, 2012 (LBO) - Sri Lanka could borrow abroad more on the back of strong interest for sovereign bonds and active encouragement by authorities but the government and companies have to manage risks, Fitch, a rating agency has said.
"There is a cost benefit in sourcing external debt for most issuers, but risks need to be addressed - particularly in the absence of a deep domestic swap market," the rating agency said.
"These risks centre on foreign currency, refinancing and the sovereign's own credit profile."
Fitch said commercial banks had the ability to mitigate risk as they had exporters as customers and larger companies could also manage risks if external debt was maintained a reasonable level to the size of their external cash flow.
"However, Sri Lanka remains exposed to volatile short-term capital flows given its persistent basic balance deficit," Fitch said.
"It may therefore be prudent for corporates to build in dollar sinking funds to meet repayments in the event of any unexpected blow to external free cash flow.
"Issuers that do not benefit from external receipts, or do not directly cater to exporter demand, may need to hedge associated risks to a large extent in order to strike a balance between lower borrowing costs and balance sheet volatility."
Sri Lanka has so far sold 4 billion US dollars in five sovereign bonds since 2007.
A 10.5 times oversubscription of the last 10 year billion dollar bond in July showed "strong investor appetite, supported by the sovereign's record of debt-servicing," Fitch said.
Fitch had upgraded Sri Lanka BB from B+ in July 2011.
Historically a few companies and have banks have found medium term funding mostly from multilateral agencies. But bank of Ceylon has sold a 500 million US dollar bond in May 2012 and others were in the pipeline.
Sri Lankan authorities were also encouraging institutions to borrow abroad to boost foreign currency inflows, which could reduce interest rates.
The Central Bank has allowed banks with foreign funding to increase credit to 23 percent this year compared to 18 percent for those will domestic financing only.