Sri Lanka is set to be included in a new JPMorgan frontier-market local-currency government bond index, potentially increasing the international visibility of the country's rupee-denominated government debt.
Reuters reported that JPMorgan plans to launch the new GBI-EM Edge index by the end of September.
The benchmark is expected to cover approximately US$330 billion of local-currency government debt across 26 frontier economies, including Sri Lanka.
Other economies expected in the index include Egypt, Vietnam, Morocco, Kazakhstan, Bangladesh, Pakistan and Nigeria.
Which bonds can enter the index?
According to the reported index methodology, eligible bonds must have at least the equivalent of US$250 million outstanding and meet minimum remaining-maturity requirements.
Individual countries will also be subject to a maximum weighting of 8%.
The index is designed to provide investors with a benchmark for local-currency government debt in frontier economies that are generally not represented in JPMorgan's principal emerging-market local-currency benchmark.
What could this mean for Sri Lanka?
Inclusion in a widely followed bond index can make a country's securities easier for international investors to identify and compare as part of a defined asset class.
It could therefore improve international visibility for Sri Lanka's rupee-denominated government securities at a time when foreign participation in the domestic Treasury market has recently been increasing.
However, index inclusion does not guarantee foreign investment.
It also does not automatically mean:
Sri Lanka will receive a particular amount of foreign capital; government borrowing costs will fall; the rupee will strengthen; or foreign investors will maintain their holdings.
Actual investment decisions will continue to depend on yields, currency risk, market access, liquidity, economic conditions and individual investors' risk assessments.
Continuity safeguard
Sineth News recently reported an approximately Rs.2.75 billion weekly increase in foreign holdings of Sri Lankan rupee government securities.
This JPMorgan development is a separate structural capital-market story and should not be presented as proof that the recent inflow occurred because of the new index.