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Tuesday, December 08, 2020
A String Of Pearls For The Adventurous
*This performance is only observed with historical backtests and not traded by the company.
The announcement of Pfizer's vaccine in the first week of November has weakened the US Dollar and triggered demand for more risk assets, especially emerging markets. More importantly, the string of vaccine announcements, Moderna followed by Astra Zeneca, has given rise to hopes that normalization of global economy might happen by second quarter of 2021. This makes the bonds of tourism dependent as well strategically located island countries, Maldives and Sri Lanka, interesting for investors.
|For a $200,000 lot size|
|Ticker||ISIN||Initial Margin||Maintenance Margin||Yld to Mty (Mid)||Cpn||Maturity||BBG Composite||Maturity Type||Currency|
|Republic of Maldives Ministry of Finance and Treasury Bond||MVMOFB||XS1617562290||$51,100||$41,100||24.57||7||6/7/2022||CCC+||AT MATURITY||USD|
|Sri Lanka Government International Bond||SRILAN||US85227SAJ50||$114,059||$91,247||26.12||6.25||7/27/2021||CCC+||AT MATURITY||USD|
Maldives: High Risk, but might scrape through
Maldives has external debt service obligations beginning from 4Q20 through 2Q22 amounting to USD494 million (of which USD142 million is due in 2021). Reduced tourism receipts due to the pandemic have greatly pressured the foreign currency buffers. The government's sovereign development fund had USD186 million equivalent of reserves in October, but its foreign-currency assets have declined to USD54 million.
According to the latest data, Foreign reserve buffers were USD696 million in September, or USD280 million net of the Maldives Monetary Authorities' (MMA) short-term foreign-currency liabilities. Currently, The MMA has drawn USD150 million on a USD 400 million currency swap line with the Reserve Bank of India, to support Rufiyaa's peg against the US Dollar.
If the Maldives can access, the $250 million of the unused currency swap line with India and if it can get some relief on interest payments (IMF and G20 already have some plans), it should be able to scrape through this tough period.
Maldivian bonds are high risk, high return. Bonds expiring in 2022 are suited for high-risk investors.
Sri Lanka: Support expected from bilateral donors
Sri Lanka recently repaid USD 4.2 billion in foreign debt and avoided sovereign default. Its forex reserves dropped 807.8 million dollars in October 2020 to 5,578.5 million dollars as the island repaid sovereign bond. Sri Lanka is about to receive an injection of around $700 million from China Development Bank, which will increase reserves and help improve its loan servicing capability.
The country is supported its relatively high levels of per capita income and modest economic competitiveness, that should enable it to post better than expected growth rates. Nevertheless, concerns over the government's capacity to meet its debt-servicing costs will persist.
The country on average has US$ 4- 4.5 billion in external debt repayment due every year from 2021 through 2025. Recently, In September, Sri Lanka International Sovereign Bonds (SLISBs) was downgraded from B to Caa1 (stable outlook) by Moody's.
Sri Lanka, however, is expected to secure financial assistance from the IMF and bilateral donors in 2021-22. The humongous victory of Sri Lanka Podujana Peramuna (SLPP), a political party led by Mahinda Rajapaksa, has improved the political stability of the country. Moreover, FDI into Sri Lanka is expected to jump.
Sri Lanka's BOI (Board of Investment) approved a US $ 24 billion oil refinery investment which will be done over a period of 5 years. The geographic location of the island and its decent infrastructure should attract global names to Hambantota Free Trade Zone (FTZ).
Sri Lanka bonds are suited for investors with a propensity to take high risk.
Risks & Assumptions
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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