Country Background Sri Lanka Investor-Country Conference Cairo, Egypt March 26-27, 2010
Macro Economic data 2000 2001 2002 2003 2004 2005 2006 2007 2008 GDP growth 6.0 (1.5) 4.0 5.9 5.4 6.2 7.7 6.8 6.0 3.0 Inflation (Annual average) 6.2 14.2 11.3 9.6 6.3 9.0 11.0 10.0 22.6 8.0 Fiscal balance Current Account CB policy rate(repo rate) Note: Sources: (9.9) (10.8) (8.9) (7.7) (7.9) (8.4) (8.0) (7.7) (7.7) (9.7) (6.4) (1.4) (1.4) (0.4) (3.1) (2.7) (5.3) (4.3) (9.3) (1.2) 17.0 12.0 9.8 7.0 7.5 8.8 10.0 10.5 10.5 7.5 1. All figures are in percentage. 2. Fiscal balance and Current Account figures are in percentage of GDP. Fiscal balance is the primary balance, excluding interest. 3. All data are projection, except the CB policy rate. WEO Sep. database: (GDP growth); Ministry of Finance, Sri Lanka (Inflation, Fiscal balance, Current account); Bloomberg: CB policy rate (Central Bank of Sri Lanka Repo rate). 2
Debt Market Snapshot 2004 2005 2006 2007 2008 Debt to GDP 109.6 90.6 87.9 84.9 81.4 86.2 External /Domestic debt Outstand ing (US $, mn) 87.1 75.6 74.6 77.1 68.0 73.3 T-bill 2,331 2,293 2,393 2,829 3,615 4,209 T-bond 6,150 7,360 8,226 9,828 11,487 14,501 YTM (years) Note: Sources: T-bill 0.4 0.3 0.3 0.3 0.4 0.4 T-bond 2.8 2.4 2.4 2.6 2.3 2.5 1. data on debt to GDP is projection. 2. Outstanding refers to domestic debt outstanding. 3. YTM refers to remaining maturities in years. WB LDB and staff calculation: (Debt to GDP); Ministry of Finance, Sri Lanka (External/Domestic debt, Outstanding, YTM). 3
Renewed Investor Confidence after end of 30 yrs Terrorist war A New Era Sharp Reduction of Interest Rate Booming Stock Market Yield Curve per cent 20 19 18 17 16 15 14 13 12 11 10 9 8 7 91 Days 182 Days364 Days 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs End Dec 08 End Dec 09 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 1-Apr-09 5-Jun-09 3-Aug-09 1-Oct-09 27-Nov-09 2-Feb-10 ASPI MPI Foreign Investments in Treasury Bill/Bond Yield of International Sovereign Bond 200 150 12 100 Rs. billion 50 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Per cent 11 10 9 8 7 6 2007 2008 5 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- 2010 Feb- 2010 Total 8.25 % 2007 Bond 7.40 % Bond 4
Introduction of Dedicated Primary Dealer System in 2000 Issue of Foreign Currency Denominated Bonds (SLDBs) in 2001 Permitting Licensed Commercial Banks to become Primary Dealers in 2002 Introduction of Fiscal Management (Restablity) Act in 2003 Introduction of Scriptless Securities Settlement System (SSSS) and Central Depository System (CDS) in 2004 Issuance of Index Linked Bonds in 2005 Introduction of Risk weighted capital adequacy framework for Primary Dealers in 2006 Opening of local Treasury bond market for foreign investors in 2007 Opening of local Treasury bill market for foreign investors in 2008. Diversification of the Primary Dealer System in. Introduction of Common Master Repo Agreement (MRA) for PDs and commercial banks Introduction of Benchmark bond series in 2010 Major Developments in the Bond Market 2000-2010
Key Challenges in Bond Market Development Unfavourable macroeconomic environment (mainly fiscal) High Inflation and inflationary expectations Lack of long term yield curve Limited ability to issue long term bonds (beyond 6 yrs) Buy and hold policy of large captive investors Limited real market makers High fragmentation of the debt market Limited liquidity in the market specially in the longer end Lack of a derivative market Lack of demand for a electronic based trading platform for the secondary market High reliance on OTC trading in the secondary market Lack of annual Auction calendar Less developed corporate bond market 6
Measures to Address Key Challenges Medium term fiscal consolidation program to lower budget deficit Medium term macroeconomic program and its positive outcome to handle inflationary expectations Debt consolidation strategy to address bunching Lengthening the maturity structure of Bonds Reopening policy to lower fragmentation Introduction of Benchmark Treasury bond series Developing Benchmark yield curve Improve market liquidity Widening investor-base by further opening local market to foreign investors Liberalisation of market operations of captive investors Popularising Bloomberg Trading Platform for secondary market trading Lowering the cost of trading in the secondary market Diversifying Primary Dealer System Aggressive awareness campaign 7
References Public Debt Management in Sri Lanka- Various Annual Publications (www.cbsl.gov.lk) Development of Domestic Debt Market and Its Implication to the Central Bank A Case for Sri Lanka by C.J.P. Siriwardena 2005 (www.seacen.org) Bond Market Development in Sri Lanka 2007 by C.J.P. Siriwardena (www.unescap.org) 8