Double-digit gains suggest turning point for Sri Lanka markets

BLOOMBERG

Sri Lankan stocks surged as markets reopened following a three-day holiday, after a plan to revamp domestic debt eased concern over financial sector stability. The Colombo All-Share Index closed 6.7% higher, its biggest single-day gain in more than 15 months, led by financial shares.
The Sri Lankan rupee advanced 0.6% to 305.01 per dollar. A 2027 Sri Lanka rupee bond saw its yield decline by over 10 percentage points to 14.5%, dealers said.
The island nation mostly spared local commercial banks in its blueprint to protect the economy while striking a balance between domestic creditors and foreign bondholders. The plan — aimed at helping restore debt sustainability in line with a $3 billion International Monetary Fund bailout — sent dollar bonds surging 12%, marking their best week since November.
“The domestic debt optimisation plan being limited to the central bank and superannuation funds is very positive for the economy,” said Dimantha Mathew, chief research and strategy officer, at First Capital Holdings in Colombo. “There may now be interest from foreign investors for rupee bonds.”
A re-rating in Sri Lankan stocks is also the most likely outcome after policymakers chose to only restructure Treasury bills held by the central bank and treasury bonds of pension funds, according to analysts at Colombo-based Asia Securities Research, who project a 34% gain in the benchmark index this year.
Sri Lanka’s government started its domestic bond swap programme, inviting investors to submit offers to exchange existing notes for new ones. Neighbouring Pakistan’s key stock gauge jumped the most in over 15 years after the nation clinched an IMF bailout. Pakistan’s rupee also surged as well.
Financial support from multilateral lenders has boosted investor confidence — and returns — across troubled emerging and frontier markets in recent months. Funds getting approved or disbursed for countries including Kenya, Tanzania, and Pakistan are giving hope that the embattled economies are turning a corner and international capital will soon start flowing in.
“The equity market in Sri Lanka has more room to run,” said Ruchir Desai, fund manager at Asia Frontier Capital, who is increasing his fund’s allocation to the nation. “I am much more optimistic on the outlook compared to the past few years.”