Sri Lanka watching for results from recent tightening: CB Governor

ECONOMYNEXT - Sri Lanka is watching for the effects of monetary policy measure to play out, and a recent spike in inflation could be due to sales taxes, Central Bank Governor Indrajith Coomaraswamy said as inflation continued to climb up.

"We still haven't seen the full effects of what had been done," he told reporters in Colombo at his first press conference being made Central Bank Governor.

He said the effect of tightening took between 9 to 12 months according to what Deputy Governor Weerasinghe said.

"Some measures have been taken, They seem to be having an effect, So we will keep watch and see."

Inflation could also be spiking due to value added tax, which had to be stripped out, Coomaraswamy said.

Analysts had expected the central bank to wriggle out of a rate hike by pointing to the increase in value added tax. It had in the past also wriggled out out timely rate hikes pointing 'supply shortfalls' and 'external' factors..

"Core-inflation has been somewhat more stable," he said.

Sri Lanka's inflation rose to 6.0 percent in June 2016 exceeding the inner bank of an International Monetary Fund program. Meanwhile so-called core-inflation, which in Sri Lanka has more non-traded items, hit 6.4 percent. In the past when core-inflation was lower than headline inflation, the central bank had used it as an excuse to wriggle out of rate hikes, and generated high inflation and currency depreciation in its wake.

The central bank released about 300 billion rupees of liquidity tied up in term repos in over 2015, cut rates in April spooking foreign investors in domestic bonds and printed over 200 billion rupees outright generating a balance of paymetns crisis and busting the rupee from 131 to 147 in sparking the current cycle of monetary instability.

Belatedly it tightned policy by raising rates back to January levels and also raised the reserve ratio, a measure that has been abandoned by most central bank banks.

However over the past two months the central bank had not bought lot of Treasury bills outright to inject excess demand to the economy but has been injecting cash overnight to banks, after defending the peg. Injecting cash overnight puts pressure on banks which are short of cash to raise deposits.

Sri Lanka 03-month T-Bill yield 8.87-pct

ECONOMYNEXT – Sri Lanka’s 03-month Treasury Bill yield eased one basis point to 8.87% at Tuesday auction but yield on longer tenors increased, data from the public debt department showed.

The yield on the 06-month bill rose 03 basis points to 9.89% while that on the 01-year bill went up one basis point to 10.65%.

The public debt department offered 48.3 billion rupees worth of bills and accepted 15.2 billion worth.

‘Macro economic variables militating against Sri Lanka’s stock market growth’

By Hiran H.Senewiratne

Sri Lanka's macro economic variables are not favorable to the country's stock market development. Current high interest rates and balance of payment issues, for instance, are getting in the way, Colombo Stock Exchange chairman Vajira Kulatilaka said.

"At present the CSE is not performing well owing to world market conditions, interest rate fluctuations and the balance of payment crisis, where exports/imports are concerned. Present market conditions are not conducive to a better performance by the local stock market, Kulatilaka explained to The Island Financial Review.

He said that the appointment of new Central Bank Governor Dr Indrajith Coomaraswamy is an excellent positive move to build local business confidence.

The CSE chairman also said that due to these external reasons foreign investors are exiting the market but it will come to a stable position soon.

"The CSE is at a highly volatile stage because business confidence is not building up fast due to past bad experiences and the manipulation of the market by a few people, Professor of Economics, University of Colombo Dr. Sirimal Abeyratne said.

There are two types of significant entities in the stock market: these are long term investors and speculators. "Speculators are a community which makes a short term profit out of making speculations on the economy while the investors pump in money to the stock market. But the latter have lost faith in the local stock market, Abeyratne said.

He said the investor part is currently the weaker out of the two entities but they are the ones that keep the flow of currency within the stock market as well. Now, with the Fitch ratings aspect coming into play, the investors will decide on withdrawing their interests and companies will also reduce the number of shares that they disperse on the Colombo stock market.

He said that investors in the bond market will have a very hard time in the days to come as they will be directly affected by the gravity of the situation. With the interest rates going up, the demand for bonds will increase.

Abeyratne believes that this will set the tone for a different outcome which will drive investors out of the stock market and ultimately diminish investor confidence.

Providing insight to the upcoming IMF engagements, Dr. Abeyratne said that "the IMF loan will provide a short term solution for a long term problem." Elaborating on his remark he said that the country has been following the same path since the 2009 crisis and that this government too has decided to ‘apply a plaster’ over the bleeding wound.

According to Abeyratne, the IMF loan will keep the country afloat for a period of three-four months, at which point, the country will have to start paying off that as well. Proposing a solution to the matter, he said that the country should have approached the issue with caution and only after implementing proper policy reforms.

Sri Lanka being a small country, any powerful individual or the government itself is able to manipulate the stock market, he said.

"Since the Sri Lankan stock market is the smallest in the region, even smaller than that in Singapore, fluctuations of this magnitude will create immediate repercussions on the economy. Such repercussions will have a huge impact on the stock market, he added.

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Motor car registrations up in May

Motor car registrations recorded 3,657 units in May up from 3,664 units a month ago but significantly down from 6,018 units 12 months ago.

The month of May also recorded a rebound recording strong growth over April in 3 wheelers, 2 wheelers and mini trucks.

In addition brand new segment registrations recorded 1,766 units in May marginally up from 1,754 units the previous month but significantly down from 3,228 units recorded 12 months ago.

Maruti recorded 1,037 units in Mayslightly down from 1,147 units the previous month but significantly down from 2,539 units 12 months ago.

Locally assembled Micro recorded 142 units down from 175 units the previous month and Hyundai recorded 168 units gaining on 126 units recorded the previous month. The slight dip in small car registrations in May could be attributable to the April numbers being boosted by the clearing up of the back log emanating from the RMV’s go slow in Feb and March according to J. B. Securities Report on this segment.

Pre owned car registrations recorded 1,891 units in May marginally down from 1,910 units a month ago and significantly down from 2,790 units recorded 12 month ago. Premium brand cars recorded 82 units in May significantly higher than 46 units the previous month and slightly lower than 93 units 12 months ago.

Electric cars recorded 85 units in May similar to the 85 units recorded the previous months but significantly down from 361 units recorded 12 months ago when the duty was only 5%. Nissan Leaf accounted for 80 of these units up from 74 units the previous month.

SUV registrations recorded 752 units in May slightly up from 709 units the previous month and up from 695 units 12 months ago. Nissan continued to maintain its leadership recording 328 units.

Hybrid registrations recorded 2,256 units in May marginally down from 2,259 units the previous month and 2,709 units 12 months ago.

Suzuki Wagon R recorded 569 units down from 599 units but significantly up from 308 units12 months ago.Toyota cars recorded 793 units up from 752 units recorded the previous month but significantly down from 1,237 units 12 months ago – Aqua accounted for 310 units, Axio for 278 units followed by Prius accounting for 196 units.

Mercedes Benz accounted for 13 hybrid units. In the SUV segment Nissan X trail hybrids accounted for 314 units.

Van registrations recorded 319 units in May slightly up from 301 units the previous month and significantly down from 914 units 12 months ago.Toyota recorded 104 units in May down from 122 units the previous month and significantly down from 401 units 12 months ago and Suzuki recorded 51units marginally down from 53 units the previous month but significantly down from 310 units 12 months ago. Financing share was 71.5%.

The 3-wheeler registrations bounced back recording 5,732 units in May up from 4,206 units the previous month but significantly down from 10,995 units 12-month ago. Bajaj claimed a segment share of 89.2% followed by TVSwith 6.2% share and Piaggio with 4.5%. Financing share was 85.6%.

The 2-wheeler registrations exploded recording 32,244 units in May significantly up from 24,188 units the previous month and 25,580 units 12 months ago. Bajaj was dethroned by Honda who claimed market leadership recording a segment share of 29.6% followed by Bajaj with 26.3%, Hero inthird place with 21.8% and Yamaha in fourth with 10.5% share.The 2 wheeler market is now evenly divided amongst all the players in contrast to earlier times when Bajaj was dominant in this category.

Scooters account for 48% of the market, Bajaj has no scooter offering so although the local agent DPMC has a wide reach the absence of an offering is a drag on their performance. Financing share was 60.5%.

Mini truck (payload < 1 MT) registrations were 1,121 units in May significantly up from 792 units in April but down from 1,315 units recorded 12 months ago. Tata the market leader recorded a share of 59.2% followed by Mahindra with 34.3% regaining its share after lacklustre performance in the past few months. Financing share was a high 92.3%.
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