Fitch Ratings’ Asia Pacific Sovereign Ratings Head, Andrew Colquhoun replying to a question made by this reporter at a seminar in Colombo on August 6 said that a country which ”almost has a similar rating like Sri Lanka” that went to the market recently was Indonesia.
He statistically pointed out that Indonesia that has an investment grade rating (compared to Sri Lanka’s junk rating) had to pay a premium of over 200 bps when it went to the market after June 19, compared to the cost it had to incur on a bond issue made two months prior to June (i.e. before Bernanke’s disclosure) in April.
Colquhoun said that the first of such Indonesian sovereign bond issues was made in April, three months prior to Bernanke’s announcement. It comprised two segments, one a 10-year bond of between $ 1-1.5 billion and the other of a 30-year tenure to the tune of $ 1 billion. The interest demanded for those bond issues was 10 year US Treasuries + 1.8%.
Post June, Indonesia again went for a bond issue, this time for $ 1 billion and the premium price it had to pay was over 100 basis points (bps), more than its April interest cost, i.e. at 3% + 10 year US Treasuries yield.
Ten year US Treasuries in April was commanding a yield of between 1-1.5%, whereas by now it has had risen by more than 100 bps to be quoted at between 2.60-2.70%.
On an average of a 1.25% rate for 10 year US Treasuries in April, the cost to the Indonesian Sovereign for that particular bond issue would have had been 3.05% and the cost to the Indonesian Sovereign for the post June 19 bond issue at a total cost of 5.65% is a premium of 260 bps that it will have to pay investors over its April issue.
Meanwhile in April, Bank of Ceylon (BoC), another local state owned entity, raised $ 500 million of five year money at an interest cost of 6.875%, 382.5 bps more than that of the Indonesian Sovereign, which raised four times that amount at an interest payment of a mere 3.05%.
Both BoC and NSB are considered quasi sovereigns by Fitch, which means their ratings are comparable to that of Sri Lanka’s rating, which is a non investment grade (junk) rating of BB-Stable. Indonesia however has a BBB- minimum investment grade rating from Fitch.
BoC’s April issue was rated BB- by Fitch.
With global interest rates on the rise, NSB has halved the value of the original offer to $ 500 million, and so also its tenure to five years. This sale is expected to be finalised next month.
Sri Lanka’s problem is its current account (c/a) deficit. To bridge that deficit the sovereign had been raising money from capital markets since 2007.
But this year it does not plan to go direct to the market on the grounds that it doesn’t want to raise its sovereign debt profile currently closer to 80% of GDP, but through quasi sovereign institutions such as NSB and BoC (which it has already done), institutions 100% controlled by the state.
By Paneetha Ameresekere