Business Times

Growth through Sri Lanka’s bond market

Financing for Sri Lanka’s infrastructure development as part of its economic growth has to come from bond markets, said a former senior Malaysian central banker. Currently the Executive Deputy Chairman of RAM Holdings Berhad Tan Sri, C. Rajandram said on Friday that developing a strong bond market results in wider access to credit and is a stable source of long term funding for the corporate sector, allowing corporations to have wider access to credit to finance viable projects. One of the biggest benefits of the bond market is that it reduces over-dependence on the banking sector for corporate debt financing and promotes long term funds.

Speaking at a presentation organized by the Association of Chartered Certified Accountants (ACCA) and RAM Ratings in Colombo, Mr. Rajandram said bond markets also result in a better distribution of credit risks as evidenced by the significant shift in corporate financing to the bond market, marked by lengthening of bond tenures to more than 10 years for large, long term issues.

The problems associated with the over-reliance on the banking system lead to a tendency to force lending by easing of credit terms. Mr. Rajandram explained that moral hazard problems also arise from bankers taking excessive risk due to perceived guarantee of government bail out, bad loans kept from being written down for long periods and the higher risk of crony capitalism. Banks are also more highly leverages than typical bond investors, leading to a higher systemic risk for the country.

The key factors driving bond market growth is the privatization of infrastructure projects and public utilities and the rise in private financing activities, especially in long term capital intensive infrastructure projects. Mr. Rajandram said the development of the bond market was supported by the Malaysian government and that 30% of the total capital formation is through the bond market. As a share of the GDP, Malaysia has the third largest bond market in the East Asian region. Japan has the largest, followed by Korea, Malaysia, Singapore, Thailand, China, Hong Kong, the Philippines and Indonesia.
Mr. Rajandram said the bond market also provides an additional option for corporate debt restructuring. During the 1998 Asian financial crisis, Malaysia converted large defaulted loans into long term bonds.

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