CBSL to Allow Foreign Investors to Hedge Currency Risk with Swaps

As part of measures to lure foreign investment back into Sri Lanka, the government also plans to channel banks’ funds into the stock market.

CBSL (Central bank of Sri Lanka) is planning to allow foreign investors to hedge their investments in Sri Lankan government securities with swaps, in a bid to attract foreign investment into the country.

Ajith Nivard Cabraal, State Minister of Money and Capital Markets and State Enterprise Reforms, informed Sri Lankan Parliament late last week that CBSL would provide swap agreements to foreign investors who invest in G-Secs.

The hope is that the move will ease concerns over the local currency’s decline and lure foreign capital back into the country.

Foreign investment in Sri Lanka’s rupee debt is down to around LKR 12 billion, from about LKR 450 billion in 2014.

Economists agree with Cabraal’s plan, saying that Sri Lanka currently cannot raise funds in international markets via ISBs (International Sovereign Bonds) because the country’s existing bonds are traded at a deep discount and high market yields.

“So, given near zero global rates, foreign investors would find our 5 percent bonds attractive provided exchange rate risk is taken away from them,” one economist told Regulation Asia.

He said that to go for forward cover, Sri Lanka will have to incur an interest cost of about 2 percent and the total cost at about 7 percent is still cheaper for Sri Lanka than the alternative of issuing ISBs at about 9-10 percent.

Minister Cabraal also said the government will convert one percent of LKR 10 trillion in total deposits in banks and financial institutions, into investments in the coming months via the CSE (Colombo Stock Exchange).

“The deposits held in assets of financial institutions instead of lending to customers, can be invested in CSE driven bonds that are dedicated to some development projects,” the economist said, noting that the choice should be given to the banks but lucrative projects should be offered for investment.