Sri Lankan rupee hits record low on political uncertainty

Reuters: ** The Sri Lankan rupee fell to a record low of 176.60 to the U.S. dollar on Wednesday, as political uncertainty outweighed the positive impact of a policy rate hike, sources said. 

** Stocks closed weaker due to political uncertainty and the policy rate hike. 

** Before the market opened, the central bank unexpectedly raised its key policy rates, in a move aimed at defending a faltering rupee as foreign capital outflows pick up amid an escalating political crisis and rising U.S. interest rates.

** Soon after the market opened, the parliament passed a no-confidence motion against newly appointed Prime Minister Mahinda Rajapaksa, a day after the Supreme Court stayed President Maithripala Sirisena’s decree to sack the parliament and call for early general polls, presenting a standoff with the opposition and throwing the country deeper into turmoil.

** The parliament was dissolved on Friday, two weeks after Sirisena sacked Ranil Wickremesinghe as prime minister and appointed former president Mahinda Rajapaksa in his place.

** The rupee ended at 176.50/60 per dollar on Wednesday, compared with the previous close of 176.05/30. It has weakened more than 1.7 percent since the political crisis began on Oct. 26 and more than 14.7 percent so far this year.

** Foreigners bought a net 26.8 million rupees worth stocks on Wednesday, but have offloaded equities worth 7.7 billion rupees since the political crisis started on Oct. 26.

** The bond market saw outflows of about 21 billion rupees between Oct. 25 and Nov. 7, central bank data showed. This year, there have been 17.1 billion rupees of outflows from stocks and 110.8 billion rupees from government securities, bourse and central bank data showed. 

** The Colombo stock index fell 0.77 percent to 5,947.36 after falling 1.9 percent last week. Heavy retail investor buying had lifted it 4.5 percent in the week before. It has slipped over 6.6 percent so far this year.

** Stock market turnover was 729.2 million rupees ($4.15 million) on Wednesday, less than this year’s daily average of 846.4 million rupees. 

($1 = 175.9000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)

Sri Lanka raises rates, cuts reserve ratio amid BOP trouble

ECONOMYNEXT - Sri Lanka's Central Bank has raised rates by 50 basis points and cut the reserve ratio by 150 basis points to release liquidity shortages that came from defending a soft-pegged exchange rate regime.

"The large and persistent shortage in rupee liquidity required the Central Bank to conduct open market operations (OMOs) on a short- and long-term basis in addition to overnight operations," the Central Bank said in a statement.

The liquidity shortages came from defending a peg and maturing swaps.

The cut in the reserve ratio would release liquidity to the interbank markets and reduce a large portion of the short.

On Tuesday, there was an 84 billion rupee overnight liquidity shortage according to central bank data.

The total liquidity shortage filled overnight and through term reverse repurchase deals were 174 billion rupees, by the end of last week, according to central bank data.

By May, which is the latest data available, commercial banks had deposited about 361 billion rupees at the central bank, indicating about 70 rupees or more may be released to the banking system.

Cutting the reserve ratio increase the ability of banks to given new loans from deposits, by reducing the share of cash to be deposited at the central bank.

Analysts say cutting the reserve ratio to inject liquidity in the middle of balance of payments trouble is a tactic that has been practised by the Reserve Bank of India and also Sri Lanka in the past.

The RBI is one of the worst central banks in Asia critics say.

Sri Lanka's ran into balance of payments trouble from February 2018 after a series of term repo auctions failed when interbank rates were below 7.0 percent.

In April the central bank cut rates and injected large volumes to liquidity to de-stabilize the soft peg, critics have pointed out.

The central bank hiked its overnight liquidity window rate by 50 basis points to 9.0 percent.

The full statement is reproduced below:

Economic Research Department 

14.11.2018

The Monetary Board of the Central Bank, at its meeting held on 13 November 2018, decided to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of commercial banks by 1.50 percentage points to 6.00 per cent. In order to neutralise the impact of this reduction and maintain its neutral monetary policy stance, the Monetary Board decided to increase the Standing Deposit Facility Rate (SDFR) of the Central Bank by 75 basis points to 8.00 per cent and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 9.00 per cent.

The Board arrived at this decision following a careful analysis of current and expected developments in the domestic and global economy and the domestic financial market, with the broad aim of stabilising inflation at mid single digit levels in the medium term to enable the economy to reach its potential.

Tight monetary conditions persisted in the domestic market

The large and persistent shortage in rupee liquidity required the Central Bank to conduct open market operations (OMOs) on a short- and long-term basis in addition to overnight operations. Overnight interest rates were allowed to remain around the upper bound of the policy interest rate corridor reflecting the prevailing liquidity conditions. The yields on government securities experienced a notable increase in recent weeks while most other market interest rates remained high both in nominal and real terms. 2

Year-on-year growth of broad money (M2b) continued its deceleration in September 2018. Nevertheless, there was a possibly short-lived acceleration in credit obtained by the private sector from commercial banks as the businesses advanced their borrowing in anticipation of measures to curb excessive spending on imports. Based on the data up to the third quarter of 2018, credit to all major sectors of the economy recorded an expansion with personal loans and advances showing a notable acceleration. It is expected that the growth of credit to the private sector would return to the expected path as measures taken by the government and the Central Bank gain traction.

Inflation declined to low single digit levels

Headline inflation, based on both the Colombo Consumer Price Index (CCPI) and the National Consumer Price Index (NCPI), decelerated below the desired mid single digit levels, largely driven by the decline in volatile food prices. Core inflation has also remained subdued reflecting well anchored inflation expectations due to the tight monetary policy stance maintained in the past. With these developments, headline inflation is projected to remain in low single digit levels during the remainder of the year and is expected to be maintained in the targeted range of 4 – 6 per cent during 2019 and thereafter with appropriate policy adjustments.

Both international and domestic developments affected the external sector performance

The expansion in import expenditure continued to outpace the growth in export earnings during the first nine months of 2018 leading to a wider trade deficit than in the corresponding period in the previous year. However, a slowdown in import expenditure is expected in the period ahead in response to the recent measures adopted as well as the depreciation of the rupee against major currencies. The moderation in tourism related inflows and workers’ remittances remained a concern in terms of the performance of the external current account. In the financial account, both the government securities market and the Colombo Stock Exchange experienced net outflows of foreign investment, particularly in the context of rising global interest rates and elevated political uncertainty.

The significant growth in imports as well as recent capital outflows amidst the broad based strengthening of the US dollar exerted pressure on the exchange rate. Although the pace of depreciation has moderated recently, the Sri Lankan rupee has depreciated by 12.9 per cent against the US dollar during 2018 up to 13 November. Meanwhile, supported by the receipt of the foreign currency term financing facility of US dollars 1 billion by the government, gross official reserves amounted to US dollars 7.9 billion as at end October 2018, providing an import cover of 4.2 months.

Economic growth is expected to remain below envisaged levels in 2018

As per the available economic indicators, real GDP growth is likely to remain subdued and below the envisaged levels in 2018. In order to accelerate growth on a sustainable basis, it is essential that growth enhancing structural reforms are carried out within a coherent and transparent framework, rather than relying on unsustainable short term monetary and fiscal stimulus, which leads to overheating of the economy.

The monetary policy decision is expected to have a neutral effect on the market

Considering the current and expected developments in relation to inflation and economic growth, as well as the current conditions in the domestic money market and the foreign exchange market, the Monetary Board of the Central Bank, at its meeting held on 13 November 2018, was of the view that the continuation of the current neutral monetary policy stance is appropriate. However, the Monetary Board observed that large and persistent liquidity deficit in the domestic money market requires policy intervention, and decided to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of commercial banks by 1.50 percentage points to 6.00 per cent from the current level of 7.50 per cent with effect from the next reserve maintenance period commencing 16 November 2018.

The reduction in SRR is expected to release a substantial amount of rupee liquidity to the banking system, thus reducing the cost of funds of banks. At the same time, in order to neutralise the impact of the SRR reduction and maintain its neutral monetary policy stance, the Monetary Board decided to raise policy interest rates of the Central Bank with immediate effect.

Accordingly, the Monetary Board raised the Standing Deposit Facility Rate (SDFR) by 75 basis points to 8.00 per cent and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 9.00 per cent, thereby narrowing the policy rate corridor to 100 basis points. These adjustments are also expected to narrow the spread between deposit and lending rates in the market.

Monetary Policy Decision:

Standing Deposit Facility Rate (SDFR) 8.00-pct 

Standing Lending Facility Rate (SLFR) 9.00-pct 

Statutory Reserve Ratio 6.00-pct

Sri Lanka’s Hayleys in second successive quarterly loss

ECONOMYNEXT – Sri Lanka’s Hayleys group reported a loss of 143.4 million rupees in the September 2018 quarter, with a sharp rise in costs and minority interest earnings, despite sales growing by more than half.

The loss, compared with net profit of 168.3 million rupees the year before, was Hayleys’ second successive quarterly loss, the group having lost 264 million rupees in the June 2018 quarter.

The loss amounted to 1.91 rupees per share in the September 2018 quarter compared with earnings per share of 2.24 rupees the year before.

In the six months to September 2018 the loss per share was 5.39 rupees. The share closed Tuesday at 189.60 rupees, down 5.40 rupees or 2.8 percent.

Second quarter group sales shot up 58 percent to 52.4 billion rupees from the previous year with gross profit up 71 percent to 11.6 billion rupees, interim accounts showed.

Net finance costs of Hayleys, which is in manufacturing, consumer durables, logistics and plantations, more than doubled to 2.6 billion rupees in the September 2018 quarter mainly because of the inclusion of Singer group, borrowings to fund acquisitions and exchange rate fluctuations.

Total profit after tax in the September 2018 quarter fell 23 percent to 509 million rupees while the profit share of non-controlling or minority interest rose 33 percent to 652 million rupees, the accounts showed.

A company statement said Hayleys surpassed 100 billion sales in the first half of the 2018/19 financial year, fueled by topline growth across all of its key businesses.

“The group incurred an increased net finance cost of 5 billion rupees, mainly due to the inclusion of Singer group, financing costs of the recent acquisitions and exchange rate fluctuation.”

All segments except for plantations contributed to the healthy expansion in turnover for the group during the half-year, the statement said.

“Revenue within the Consumer & Retail segment expanded substantially from 2.7 billion rupees to 31.5 billion rupees in 1HFY18/19, bolstered by the contributions of Singer (Sri Lanka) Group which were acquired by Hayleys at end of 2Q18, generating 2.4 billion rupees in operating profits.”