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Sri Lanka in new IFC bond index and fund
Real estate news By Asantha Sirimanne
22 October 2007 14:33:29
Sri Lanka has been included in a new World Bank backed initiative to expand the international appeal of local currency bonds of emerging countries. The International Finance Corporation (IFC), the World Bank's private sector financing arm, and the International Bank for Reconstruction and Development (IBRD) which finances middle income countries would first raise five billion dollars. "Seventy percent of the emerging market bonds are denominated in local currency bonds, but only 10 percent of the foreign money going into emerging market bonds is denominated in local currency," says Micheal Klein of the IBRD. "The other 90 percent is denominated in foreign currency. So there is now a possibility to open up emerging market local currency debt for foreigners, helping countries manage their exchange rate risks better."
IFC says about 4,000 billion dollars worth of emerging market debt is in issue of which about 1000 billion dollars is tradable as most of it is tied up in reserve requirements. Of the tradable portion only about 700 billion is denominated in local currency. The Global Emerging Markets Local Currency Bond Fund (GEMLOC) would be managed by a private sector fund manager to be selected by November this year. The fund manager would start raising money from public and private sources from the first quarter of 2008 and start investing in government and private emerging market local currency bonds. The fund could invest up to 30 percent in sub-national bonds.
In the first year about 15 to 20 countries would be included in the move, to be expanded to 40 countries in the next two years. "We hope to include Sri Lanka after the first year," Oliver Fratzcher from the World Bank's capital market department told LBO. Earlier this year Sri Lanka raised 460 million dollars from local currency bonds from foreign investors, including hedge funds. At the time of issue the most popular 5-year bond maturing in 2012 yielded around 14.25 to 14.50 percent a year. Subsequent monetary tightening in the face of currency pressure had seen yields rise to above 17.00 percent. Some foreign investors had even bought 10-year bonds, though in the face of rising interest rates, they have sought to move into shorter maturities.
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