Sri Lanka’s dollar bonds are drifting lower as investor concerns grow that the completion of a debt restructuring agreement with creditors could be delayed by next month’s presidential election.
The country’s dollar bonds due in 2030 traded below 55 cents on the dollar on Wednesday, down from 59 cents in mid-June. This month, Sri Lanka has been the second-worst performing emerging-market debt, following Lebanon, according to indexes compiled by Bloomberg.
In July, Sri Lanka reached a preliminary agreement with private investors to restructure $12.6 billion in bonds, which still requires approval from the International Monetary Fund (IMF) and bilateral creditors such as China and France. A month later, the government requested more details from the IMF regarding its assessment of the proposed debt restructuring.
“Sri Lankan bonds have underperformed other defaulted bonds, likely due to uncertainty about the timing of the bond exchange and political uncertainty surrounding the upcoming elections,” said Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management.
A gauge of Sri Lanka’s dollar bonds has dropped 1.6% this month, according to Bloomberg data. Despite this, the country’s sovereign debt has returned 9.7% so far this year, outperforming the Bloomberg Emerging Markets Hard Currency Aggregate Index, which has risen 6.2%.
Ongoing Discussions
Sri Lanka remains in “continued discussions on the debt restructuring process,” according to Junior Finance Minister Shehan Semasinghe. The government has received an initial assessment from its Official Creditor Committee on the comparability of treatment in relation to the deal signed with bondholders in July and is awaiting further details.
“Once these details are received, it will be possible to engage further with bondholders and conclude the process,” Semasinghe added, without specifying a timeline for the final agreement.
The creditor group from the July agreement declined to comment.
The country is set to vote in a presidential election on September 21, with incumbent Ranil Wickremesinghe seeking a mandate for his fiscal reforms as Sri Lanka strives to stabilize its economy after a default in 2022. The IMF is reviewing the restructuring deal to ensure it aligns with the debt parameters of its $3 billion loan to the country.
Concerns linger about the debt deal, particularly whether it treats all creditors fairly, as bilateral lenders are often reluctant to disclose their borrowing details. The agreement with private bondholders includes a 28% nominal reduction on the bonds’ principal and the issuance of macro-linked bonds, whose payouts are tied to economic growth.
Barclays Plc analyst Avanti Save noted that while there’s limited time to finalize the debt deal before next month’s election, she doesn’t rule out the possibility of an agreement being reached beforehand.
“Bonds are down as it’s unclear whether the IMF or official creditors agree with the deal,” said Thys Louw, a portfolio manager at Ninety One UK Ltd. “I think the deal won’t be finalized until after the election.
