Sri Lanka debt tumbles as traders see rising political risk

• Some investors see intensifying selloff as buying opportunity
• Opposition leaders have said they’d renegotiate IMF program

Bloomberg: A selloff in Sri Lanka dollar bonds intensified on Monday as investors reduced their country exposure over rising political uncertainties before elections later this month.

The country’s dollar bonds due in 2030 fell 3 cents on the dollar to 49.9 cents, the lowest level since February, extending their decline from their peak this year to about 15%. Notes due in 2027 dropped more than 1 cent to 49.6 cents.

Market pressure has intensified before elections on 21 September as investors worry that a shakeup in leadership could upset debt talks that have stalled near the finish line. Opposition leaders have said they would look to renegotiate the terms of Sri Lanka’s program with the International Monetary Fund.

“It is looking probable that Sri Lanka will need to further refine the terms of the deal agreed with bondholders” and will struggle to do so before the election, said Eng Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle Investment. “Whilst I expect volatility to persist, the sharp selloff we have seen over the past few sessions may attract some ‘bargain hunting’ activities.” 

Anura Kumara Dissanayake, popularly known as AKD, leads the National People’s Power, a coalition of leftist political parties and groups backed by protesters who ousted the Rajapaksa Government in 2022.  He is campaigning on a platform of clean governance and eliminating corruption and has vowed to reopen negotiations with the IMF. His party opposes the debt restructuring framework agreed with the multilateral lender.

Dissanayake emerged as a key challenger to incumbent President Ranil Wickremesinghe, who remains unpopular for carrying out austerity measures in exchange for an IMF bailout. 

“The current weakness in Sri Lankan bonds reflects the heightened uncertainty around election outcomes and consequently the timeline of the restructuring,” said Purvi Harlalka, a senior emerging markets sovereign debt strategist at M&G. A possible NPP victory would push the timeline considerably beyond what the market was previously expecting, she said.

“I think investors are adjusting position ahead of the election,” said Singapore Eastspring Investments fund manager Eric Fang. “We think any big price correction present an opportunity to buy as the sovereign is on a recovery path and the debt deal presents a fair outcome for both issuer and investors.”