Saturday, June 27, 2015

The Biggest Fabrication of the Truth by Harsha de Silva

The Hambantota port project was a long overdue long term investment. The investment in the southern port was done with the intention of providing employment and capturing of significant foreign exchange revenue from fuel bunkering and transhipment facilities. This was discussed and debated during the 2002 government of Chandrika and Ranil but it did not get the required leadership and management to commence the project.

It was President Rajapaksa who embarked on this much needed southern port project in 2008. Phase-1 was estimated at $60 million.

Exim bank China was agreeable to finance 85% of the project cost. The final financial term sheet of 15 years was given by the Chinese bank. With 3 to 5 years grace periods. Based on buyer finance. This facility was offered on fixed rate or floating rate (i.e. variable interest rate) while the currency of finance was USD.
The fixed rate borrowing is where the lender fixes their interest rate payments throughout the tenure of 15 years. The floating rate interest rate is based on USD LIBOR ( London Inter Bank Offer Rates) plus a credit spread. So during the term of the loan the credit spread remains fixed while the LIBOR changes each period, as it's a variable rate.

The decision to choose between the two interest rates options was given to the borrower i.e. the Sri Lankan Government. The forecast was that LIBOR rates would increase during the period of 15 years. This was also projected by investment banks and multi lateral agencies.

This made the decision difficult. However the comparative study indicated that a fixed rate of 6.25% was acceptable given that the LIBOR rate plus credit spread would work out at 7.45%.

Additionally the country was on a war footage since 2005. Foreign Funding costs were high as the country's Credit Risk Premium was high. Any Dollar Bond financing was going to be very costly. Furthermore Bond financing does not have a grace periods of 3 to 5 years. Additionally we must be mindful that international lenders would not have taken Sri Lanka’s 15 years credit risk during the war period. Therefore the maximum tenure available for Sri Lanka’s Dollar Bond was 10 years. This made the Chinese finance more pragmatic and beneficial from the analysis.

However after the signing of the loan agreement in 2008 the global financial crisis hit and USD LIBOR rates plummeted to an all time low. Interest rates and commodity (crude oil too) prices fell globally. Average USD LIBOR fell from 4.5% in 2005 to 1.50% in 2009 and to 0.25% by 2013. The Sri Lankan Government discussed this situation with China and was making arrangements for the loan to be re-converted to floating rate agreement.

However the government changed. This is what happened.

The current “Sirisena, Chandrika and Ranil Trio" Government also proved their incompetency and poor judgment as they borrowed $500 million for 10 years at a fixed interest rate of 6.125%. This is despite the current government inheriting a country free from war, improved external reserves and improved external credit rating (confirmation received by Fitch Rating Agency USA).

On the other hand in 2008 given all the difficulties locally and globally President Rajapaksa secured 15 years funding at today's borrowing costs incurred by the Trio and Kottamalli Economist Harsha de Silva.


I challenge Harsha to hedge oil import contracts and all other foreign currency interest rate obligations. As these are at their lowest level now.

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