US embassy cable - 05COLOMBO1375

UNCLAS SECTION 01 OF 02 COLOMBO 001375 
 
SIPDIS 
 
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 
services. 
 
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. 
BECKER