Investors are betting that Sri Lanka will win final approval for about $2.9 billion bailout from the International Monetary Fund on Monday, a key step for the bankrupt nation to revive its economy from the worst crisis in decades.
The South Asian nation’s dollar bonds have returned 20% this year, the top performers in the world. The local currency surged 8% and stocks climbed 5% this month, beating their Asian peers on anticipation of billions of dollars in financing trickling in. The rupee fell 45% last year, while the CSE All-share index declined more than 30% in 2022.
The funds are crucial to restore stability and debt sustainability for an economy mired in a recession. Through 2022, shortages of essential goods from fuel to medicines loomed large, stoking Asia’s fastest inflation and depleting funds.
Since defaulting on its dollar debt in May, Sri Lanka has taken tough measures to put its economy back on a steadier path, including cutting subsidies, raising taxes and loosening its control on the currency. It also increased borrowing cost to the most since 2001.
Sri Lanka also secured debt assurances from bilateral creditors including India, China and Paris Club nations and initiated good-faith negotiations with private bondholders as pre-requisites to getting the bailout.
“The pathway appears to have been gradually cleared for the IMF board to sign off on the program,” said Esther Law, senior investment manager for emerging-markets debt at Amundi SA in London. “One would expect the bonds move up slightly in price the moment the IMF program is announced.”
Debt due in 2030 has risen to about 36 cents on the dollar from 21 cents in November. The IMF bailout will help support bond prices at current levels while more gains will depend on how successful the nation is in raising revenue, said Edwin Gutierrez, London-based head of emerging-market sovereign debt at abrdn plc.
Foreign investors are also expected to boost their holdings of Sri Lanka’s government bonds on bets a bailout would unlock more funding to stabilize the nation’s finances. “You can’t wait until the debt restructuring is over, after that the price points will be very different,” said Bingumal Thewarathanthri, the chief executive officer for Standard Chartered Plc in Sri Lanka.
The island nation has a long track record with the IMF. It secured 16 bailouts since the 1960s with the last one in 2016. Disbursements by the Washington-based lender are spread across the duration of the program and tied to reviews, while an initial amount is released subsequent to board approval.