Sri Lanka is set to become one of the largest country weights in JPMorgan’s new frontier-market local-currency Government bond index. Four years after default made Sri Lanka virtually untouchable to sections of international capital, global investors are being given another reason to look at Colombo.
Sri Lanka’s rehabilitation in international capital markets has taken another significant step, with the country expected to become one of the largest components of JPMorgan’s new frontier-market local-currency Government bond index.
The GBI-EM Edge index is expected to be launched at the end of September and will track local-currency Government debt across a group of frontier economies. Sri Lanka is expected to enter close to the maximum country weighting permitted by the index, placing it alongside some of the largest markets in the new benchmark.
Submit Your Press Release
Get your company news, announcements, launches, appointments and events in front of a wider audience.
That may sound like the obscure machinery of international finance. It is anything but.
Global bond indices influence where enormous pools of institutional money are allocated. Funds that track or benchmark themselves against an index must pay attention to the countries included in it, and inclusion can consequently increase international visibility and create additional demand for eligible Government securities.
For Sri Lanka, the timing is particularly interesting.
Foreign investors have already been returning to the domestic Government securities market, recording thirteen consecutive weeks of net purchases. The JPMorgan development could strengthen that trend by placing Sri Lankan rupee debt directly in front of a wider universe of international investors.
It is also an extraordinary change in perception from 2022.
Then, Sri Lanka was a sovereign defaulter with almost exhausted usable reserves, severe shortages and an economy in free fall. International investors were calculating how much they might recover from Sri Lankan debt rather than contemplating how much more of it they should buy.
Four years later, the conversation has changed.
That does not mean the risk has disappeared. Sri Lanka remains heavily indebted, the rupee has weakened this year and the renewed Middle East crisis threatens the country through higher oil, freight and insurance costs. Foreign investors buying rupee debt must therefore weigh attractive yields against the possibility that currency depreciation erodes those returns.
There is another reason for caution.
Foreign portfolio capital is useful, but it is not the same thing as long-term foreign direct investment. A factory, hotel or technology operation cannot leave Sri Lanka at the press of a computer key. Money invested in Government securities can.
The JPMorgan inclusion should therefore be regarded for what it is: an important signal that international financial markets are beginning to treat Sri Lanka differently.
That is an achievement worth recognising. Keeping them interested will be considerably harder.
