By Paneetha Ameresekere
Ceylon Finance Today: Volatility in markets will continue today from where it left off on Monday after a brief two day interlude due to the poya and independence day holidays because of the restart of foreign funds' exit from the stock market, import pressure and the State buying of US dollars to meet its various commitments, sources told Ceylon FT.
Monday saw a net foreign outflow (NFO) of Rs 180.4 million led by JKH, the bourse's largest capitalized stock which suffered a NFO of Rs 404.1 million due to a mix of exchange rate (ER) volatility, the interim budget of the new government confirming that the group's proposed casino business was banned and a retrospective 25% tax on corporates, which earned more than a Rs two billion profit in the financial year 2013/14, to which bracket JKH too falls into, also introduced in that budget.
Casualties of retrospective taxes are not only companies, but also the middle class citizen, where, as a result of such retrospective taxes included in that budget, duties of hybrid vehicles had also gone up by Rs two million even after letters of credit had been open for such imports, prior to the budget.
Meanwhile, rupee volatility on the previous market day (Monday) was led by State buying of US dollars on thin trading, compounded by foreign exits from the stock market, which saw the Central Bank of Sri Lanka (CBSL) pressing the panic button due to fears that such activities would cause depreciating pressure on the rupee.
A weak rupee hits the poor the hardest because SriLanka is an import dependent economy. It also compounds Government of Sri Lanka's (GoSL's) foreign debt servicing commitments, as the required dollars, which are bought after paying the equivalent in rupees to meet such obligations become more expensive, when the local currency becomes week.
"What is causing GoSL to panic is the forthcoming general elections due to be held in another four months' time from now in June," sources said. Until such timeGoSL will be keen to keep the rupee stable so as to not upset the voter, they said.
Monday was a classic case of panic by the authorities vis-à-vis the ER, sources said. The ER which closed weaker last Friday (30 January) at Rs 133.20 to the US dollar in interbank 'spot next next' trading on thin volumes, started the following day Monday (2 February) stronger at Rs 133, they said.
However, CBSL in trying to distort the market, tried to place a cap on the dollar at Rs 132.80 in 'spot next next' trading, they said. However, the market reacted strongly against this negativism, by trading on seven days forward instead, at a premium price of Rs 133.40, unchanged over its previous day's close.
This effectively meant that the market was paying a 60 Sri Lanka cents premium for each dollar bought over that of the administered "spot next next" price which only had a theoretical value of Rs 132.80, they said.
That premium price was for a three day disadvantage vis-à-vis the selling (exporter) banks, they said. Whereas spot next next purchases made on Monday would be settled on 10 February, those of seven day forwards would be settled three days later, on 13 February.
If an importer made a US$ one million booking on seven days forwards on Monday that would translate to him having to pay a premium of Rs 600,000 over an administered spot next next price of Rs 132.80 under CBSL's moral suasion umbrella, sources said.
That premium cost would ultimately have to be borne by the consumer because the importer would pass on that burden to the end user and not absorb such costs, they said.
If however there was no GoSL intervention on Monday and assuming that "spot next next" transactions continued to be conducted at Rs 133 as had been the case at the beginning of that day, the premium over the administered spot next next price would have had been only 20 cents, translating to a premium cost of only
Rs 200,000 on a US$ one million transaction; with the added advantage of the consumer being able to get his goods three days earlier, saving other possible additional costs such as possible higher borrowing costs, they said.
"The message is that the authorities can never control market," the sources said.
But by attempting such perversions, the cure would be worse than the sickness as the aforesaid example showed, sources said.
www.ceylontoday.lk
Ceylon Finance Today: Volatility in markets will continue today from where it left off on Monday after a brief two day interlude due to the poya and independence day holidays because of the restart of foreign funds' exit from the stock market, import pressure and the State buying of US dollars to meet its various commitments, sources told Ceylon FT.
Monday saw a net foreign outflow (NFO) of Rs 180.4 million led by JKH, the bourse's largest capitalized stock which suffered a NFO of Rs 404.1 million due to a mix of exchange rate (ER) volatility, the interim budget of the new government confirming that the group's proposed casino business was banned and a retrospective 25% tax on corporates, which earned more than a Rs two billion profit in the financial year 2013/14, to which bracket JKH too falls into, also introduced in that budget.
Casualties of retrospective taxes are not only companies, but also the middle class citizen, where, as a result of such retrospective taxes included in that budget, duties of hybrid vehicles had also gone up by Rs two million even after letters of credit had been open for such imports, prior to the budget.
Meanwhile, rupee volatility on the previous market day (Monday) was led by State buying of US dollars on thin trading, compounded by foreign exits from the stock market, which saw the Central Bank of Sri Lanka (CBSL) pressing the panic button due to fears that such activities would cause depreciating pressure on the rupee.
A weak rupee hits the poor the hardest because SriLanka is an import dependent economy. It also compounds Government of Sri Lanka's (GoSL's) foreign debt servicing commitments, as the required dollars, which are bought after paying the equivalent in rupees to meet such obligations become more expensive, when the local currency becomes week.
"What is causing GoSL to panic is the forthcoming general elections due to be held in another four months' time from now in June," sources said. Until such timeGoSL will be keen to keep the rupee stable so as to not upset the voter, they said.
Monday was a classic case of panic by the authorities vis-à-vis the ER, sources said. The ER which closed weaker last Friday (30 January) at Rs 133.20 to the US dollar in interbank 'spot next next' trading on thin volumes, started the following day Monday (2 February) stronger at Rs 133, they said.
However, CBSL in trying to distort the market, tried to place a cap on the dollar at Rs 132.80 in 'spot next next' trading, they said. However, the market reacted strongly against this negativism, by trading on seven days forward instead, at a premium price of Rs 133.40, unchanged over its previous day's close.
This effectively meant that the market was paying a 60 Sri Lanka cents premium for each dollar bought over that of the administered "spot next next" price which only had a theoretical value of Rs 132.80, they said.
That premium price was for a three day disadvantage vis-à-vis the selling (exporter) banks, they said. Whereas spot next next purchases made on Monday would be settled on 10 February, those of seven day forwards would be settled three days later, on 13 February.
If an importer made a US$ one million booking on seven days forwards on Monday that would translate to him having to pay a premium of Rs 600,000 over an administered spot next next price of Rs 132.80 under CBSL's moral suasion umbrella, sources said.
That premium cost would ultimately have to be borne by the consumer because the importer would pass on that burden to the end user and not absorb such costs, they said.
If however there was no GoSL intervention on Monday and assuming that "spot next next" transactions continued to be conducted at Rs 133 as had been the case at the beginning of that day, the premium over the administered spot next next price would have had been only 20 cents, translating to a premium cost of only
Rs 200,000 on a US$ one million transaction; with the added advantage of the consumer being able to get his goods three days earlier, saving other possible additional costs such as possible higher borrowing costs, they said.
"The message is that the authorities can never control market," the sources said.
But by attempting such perversions, the cure would be worse than the sickness as the aforesaid example showed, sources said.
www.ceylontoday.lk
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