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Big foreign bond buy swells Sri Lanka’s reserves

[Reuters, Thursday, 20 August 2009 10:51 No Comment]

Sri Lanka’s central bank on Thursday said a U.S. asset manager bought more than $875 million in treasury bonds this week, the island nation’s first big foreign investment since the end of a 25-year war in May.

With the investment, Sri Lanka’s foreign exchange reserves have grown by more than a third to over $3 billion.

Currency traders said the influx put upward pressure on the rupee LKR=, but the central bank said it would absorb all inflows via government securities to keep it from rising from its present rate of 114.80 and hurting exporters.

"These investments are for long-term treasury bonds of four years and six years. So there won’t be any calamity of rapid withdrawal of funds," said K.D. Ranasinghe, director at the central bank’s economic research department. Ranasinghe declined to identify the buyer.

The four-year T-bond LK4YT=RR was trading near 12.90 percent with an 8.5 percent coupon, while the six-year T-bond was trading at 13 percent with an 11.75 percent coupon, traders said.

Central Bank Governor Ajith Nivard said the deal was the fruit of a series of presentations the central bank made for asset managers in July, with the help of JPMorgan and HSBC.

"Our strategy to access global investors direct and convey the Sri Lankan credit story is paying off very well," Central Bank Governor Ajith Nivard Cabraal told Reuters.

Sri Lanka limits foreign holdings in outstanding government securities to 10 percent, equal to $1.8 billion as of Friday.

"Now foreigners have invested around $1 billion and we have a significant space," Ranasinghe said.

Assistant Governor Nandalal Weerasinghe said the central bank would prevent appreciation pressure by buying up all dollars with government securities since investors always have the option of exiting by selling their holdings in the secondary market.

Sri Lanka faced a balance-of-payments crisis after the global financial crisis prompted foreign investors to cash out $600 million in government securities in the last four months of 2008.

That and the central bank’s defence of the rupee against depreciation cost it half its forex reserves, which prompted the central bank to seek a $2.6 billion International Monetary Fund loan that was sealed in July.

The IMF loan’s terms limit Sri Lanka to accessing no more than $500 million in new external borrowings this year, but the sale of the existing securities does not violate that condition.

[Full Coverage]

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