Sri Lanka issued $1.5 billion in bonds in its second sale of the year, despite a widening budget deficit and growing investor concern in the island.
On Wednesday, $1.5 billion was raised by issuing a 10-year sovereign bond at 6.85 per cent, above the 6.1 per cent for $650m in bonds Sri Lanka raised in May.
The move comes after S&P issued a "B+" sovereign credit rating on Tuesday morning which it said "reflects the country's relatively low wealth, improving but still moderately weak external liquidity, and a high government debt and interest burden".
Sri Lanka has faced a widening budget deficit and growing depreciation of the rupee, since the change in government earlier this year.
A senior figure with reported close links to the government, told the Financial Times anonymously that the move was needed due to dwindling reserves. An earlier $400m swap facility with the Reserve Bank of India has been entirely used.
"We are a twin deficit country going to the market at a time when conditions are less favourable for all emerging markets, but the way we have been burning through reserves it doesn't leave much choice," said the senior figure.
After the August elections when a new parliament took power, Sri Lanka’s Finance Minister Ravi Karunanayake said the government would not be able to stick to a target deficit of 4.4 percent of gross domestic product. It was instead likely to reach 6.5 - 6.8 percent of GDP.
Subhashini Abeysinghe, an economist at Verite Research said “the situation was already unsustainable, but now it is more unsustainable”. “The fiscal problems have been building up for years, but election year made it worse”.