Cablegate: Sri Lanka to Apply for a Sovereign Rating
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 COLOMBO 001375
E.O 12958: N/A
TAGS: ECON EFIN EAID CE ECONOMICS
SUBJECT: Sri Lanka to apply for a sovereign rating
1. Summary: The Government of Sri Lanka (GSL) is
getting ready to apply for a sovereign debt rating.
The rating is expected to facilitate debt financing
and improve awareness of Sri Lanka in international
fixed income markets. Sri Lanka is one of few
countries in the region without a sovereign rating.
Meanwhile, Sri Lanka's equity market boomed recently
when a major mobile operator raised Rs 8.5 billion
($85 million) through a public share issue. Despite
current economic and political uncertainties, the
share issue attracted heavy foreign interest,
reflecting the investment potential for well run
companies in rapidly growing sectors. End Summary.
2. On August 1, the Central Bank of Sri Lanka
announced the decision to obtain a sovereign rating
and the appointment of Citigroup as the rating
advisor for the proposed rating. The selection
follows recent presentations to the government by
seven global investment banks. Citibank N.A. Colombo
sources told the Embassy that their company is very
pleased with the selection as it is considered a
privilege to provide sovereign rating advisory
3. Sri Lanka is one of few countries in the region
that does not have a sovereign rating. According to
banking industry sources, the absence of a sovereign
rating hinders both government and corporate sector
ability to raise overseas funds. In the past, GSL's
dollar denominated debt was issued mainly to banks
present in Colombo. The rating is to be finalized by
October 30, 2005 and announced in early November to
coincide with the presentation of the 2006 GSL
budget. According to banking industry sources, the
GSL is keen to establish a long term yield curve.
(Note: A yield curve plots the movement of interest
rates. End Note.) The government is expected to go
for a $500 million 10 year bond issue with the
rating. This move would also help Sri Lankan
companies raise funds in international debt markets.
R. A. Jaytissa, Assistant Governor of the Central
Bank of Sri Lanka, told the Embassy that the
government is likely to seek ratings from three
international rating agencies: Moody's, Standard &
Poor and Fitch (which is present in Colombo).
4. Ravi Abeysuriya, former head of Fitch Ratings Sri
Lanka told the Embassy that he expects Sri Lanka to
get rated B+, similar to the foreign currency debt
rating assigned to Sri Lanka Telecom (SLT) by
Standard and Poor. SLT is the only Sri Lankan
corporation to receive a foreign rating thus far.
According to Abeysuriya, the best Sri Lanka could
expect is BB-. In 2003, when Sri Lanka announced a
desire to seek a rating, Abeysuriya had predicted a
rating of BB (which is higher than BB- and B+),
similar to India's foreign debt rating at that time.
Explaining the differences in his predictions,
Abeysuriya said that India has progressed much more
rapidly than Sri Lanka and Sri Lanka's situation has
deteriorated since then. He says that Sri Lanka has
no strong story to sell to a rating agency now that
it is "mired in political and economic uncertainty."
Key macro economic imbalances have surfaced, with
inflation running around 13 percent. Although the
balance of payments has improved, the improvement is
due to tsunami aid and not to structural improvements
in the economy.
Dialog Public Offering
5. The absence of a sovereign rating has not
hindered the equity market, as reflected by the
success of a recent initial public offering (IPO) by
Dialog, a Malaysian owned mobile operator. Dialog
dominates the rapidly expanding mobile services in
Sri Lanka with a 60 percent market share.
6. Dialog issued 712 million one rupee (1 US cent)
shares on a book building basis at between Rs 8 to Rs
12 per share, raising Rs 8.5 billion ($85 million).
The issue was 6.5 times oversubscribed. Foreign
subscribers (mainly hedge and mutual funds) applied
for Rs 40 billion ($400 million) worth of shares and
were allocated 40 percent of the total shares. The
trading of Dialog shares saw CSE's All Share Price
Index recording its highest level in history and
market capitalization rising by Rs 111 billion ($1.1
billion) to Rs 619 billion ($6 billion). Stock
brokers believe that Dialog's sheer size, liquidity
and relevance to the economy will make the issue a
key holding for funds invested in Sri Lanka.
7. COMMENT: With the existence of current political
and economic issues ranging from timing of presidential
elections, tsunami reconstruction-related challenges,
among others, GSL's plans to apply for a sovereign
rating might not be the most timely. Nevertheless, the
success of Dialog reveals the potential of well run
highly productive companies in growing economic sectors
such as telecommunications, to thrive despite political
and economic uncertainties.