June 13, 2008 / 3:32 AM / 11 years ago

RPT-Fitch concerned over S.Lanka's high foreign borrowing

COLOMBO, June 12 (Reuters) - Fitch Ratings is concerned over Sri Lanka’s increasing foreign commercial borrowings, the rating agency said on Thursday.

Sri Lanka launched a five-year $500 million bond LK032736246= in October, its first sovereign bond, with a yield of 8.25 percent.

The government has also announced it plans to borrow $150 million from Standard Chartered Bank on a 3-year maturity at 3-months LIBOR plus 259 basis points per year, which is expected to be extended to up to $250 million through a syndicated loan.

Deutsche Bank also was selected by the government to lend $50 million on a 5-year maturity at LIBOR plus 370 basis points.

“That’s definitely a concern. Because it exposes the government to an elevated risk,” James McCormack, head of Fitch’s Asia sovereign ratings told Reuters in an exclusive telephone interview from Hong Kong.

“(There are) currency risks because it is borrowing in foreign currency, and interest rate risk, because it is borrowing on commercial terms. That is something, from the rating perspective I would prefer not to see.”

The central bank’s annual report showed non-concessional foreign debt in 2007 had risen 282 percent to 226.6 billion rupees ($2.1 billion) from a year earlier.

The Sri Lankan rupee LKR= fell over 6 percent against the dollar in the first 9-months of 2007, mainly due to a hefty trade deficit. However, it retreated and rose over 5 percent in the last three months after $500 million inflow from the debut bond.

The rupee has also risen 0.9 percent this year, mainly due to dollar inflows from foreign borrowings.

The central bank relaxed the restrictions for foreign investors in the local bond market, by increasing the limit of the bonds held by foreigners to 10 percent from 5 percent of the total outstanding amount in the treasury bonds.

The central bank also opened the treasury bill market for foreigners on May 6, making around $3.5 billion worth of treasury bills available for foreigners.

Fitch Ratings, which downgraded Sri Lanka’s sovereign rating to B plus from BB- (double B minus) on April 3, said high foreign borrowing has also undermined the central bank’s effort in controlling inflation.

“In order to borrow long term money in your own currency, inflation has to be relatively low. It is an absolutely critical element of developing the local currency bond market. It is not happening in Sri Lanka,” McCormack added.

The chief economist of the central bank said the increased foreign currency borrowing programme was justified.

“The government maintains a balance between external and domestic borrowing, so that there will be no significant pressure on the domestic market,” Nandalal Weerasinghe, who is also director of the economic research department at the bank, told Reuters.

“The borrowing requirement is in consistent with the 7 percent budget deficit for 2008.” ($1=107.88 rupees)

Editing by Gerrard Raven

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