• Rs. 2.1 t targeted from non-bank sources to finance budget deficit
• Demand for treasury bonds expected to fall short of supply

Sri Lanka’s reliance on domestic market borrowing will remain high in 2025, mainly through treasury bonds (T-bonds) as it looks to finance the budget by Rs. 2.1 trillion through non-bank borrowing, Standard Chartered Global Research said.

Accordingly, Standard Chartered said that the 2025 fiscal deficit target of 6.7% of GDP translates to a net financing requirement of Rs. 2.2 trillion, an 8% increase from 2024’s revised estimate of Rs. 2.04 trillion.

It said that in 2025, the government has budgeted to finance Rs. 2.125 trillion via domestic sources, mainly non-bank borrowing.

“We assume that this will be split between treasury-bills (T-bills) and treasury-bonds in the ratio of 10:90%, resulting in net issuance of Rs. 213 billion of T-bills, and Rs. 1,913 billion of T-bonds,” it added.

Standard Chartered also said that in 2025 it estimates rupee bond redemptions to be Rs. 969 billion, resulting in gross bond issuance of Rs. 2.9 trillion.

“We peg net 2025 T-bond issuance at Rs. 1.9 trillion, and gross at Rs. 2.9 trillion based on our estimates of demand from various market participants,” it said, adding that they think the overall demand-supply balance in T-bonds is likely to remain unfavourable.

Moreover, it said that although demand from domestic savings institutions (pension/provident funds) is likely to remain strong, demand from cyclical investors (banks) may wane amid limited further monetary easing.

“Therefore, we expect demand for bonds to fall short of the supply and maintain our neutral outlook on rupee bonds,” Standard Chartered said.

The budget 2025 has set out a total gross borrowing requirement of Rs. 4 trillion as the government looks to service Rs. 4.55 trillion debt in 2025, where Rs. 2.95 trillion is interest payments.