April 2020

Overview

The industry sector operated with excess capacity in April due to the confinement. Tourism and trade sectors were crippled by the travel restrictions and import controls. Prices at Colombo tea auction rose sharply in April amidst falling domestic production.

With exports, remittances, and tourist receipts falling to historical lows, rupee was facing immense downward pressure early April. Capital flight continued from the debt market. Foreigners were net sellers of the government securities. However, the reserve position improved marginally in April.

Prices of Sri Lanka’s ISBs recovered to some extent, but started to deteriorate towards the end of the month. In the meanwhile, the SLDBs auctions also went massively undersubscribed.

Money market activity remained dull during April especially in the first half but the short-term interest rates continued to decline. Liquidity in the money market remained for the most part.

Despite the fact that secondary bond market volumes were somewhat thin during the month, the yield curve shifted down across all maturities. AWPLR remained at upper single digit levels in April and displayed some volatility over the weeks. Inflation moderated in April with prices of vegetables and rice falling noticeably.

Interest Rates

Short-term rates

Figure 1: Treasury bill yield and money market rates

Notes: AWCMR- Average Weighted Call Money Rate,
SDFR- Standing Deposit Facility Rate, SLFR- Standing
Lending Facility Rate, T-bill yields are for the secondary market, ARR – Average Repo Rate
Source: CBSL

Money market activity remained subdued during April especially in the first half. The CBSL cut the policy rates by 25 basis points early April (to SDFR – 6% & SDLR -7%) immediately causing call rates and repo rates to decline by 25 and 22 bps respectively.

The money market rates remained almost flat till the end of the Sinhalese and Tamil New Year holidays before starting to move down gradually with repo rates displaying some noticeable volatility. In the second half market activity somewhat rebounded.

Repo volumes were thin. The CBSL offered term reverse repos throughout the month but the demand dried off during the second half. Even the overnight repos offered by the CBSL had very little demand in the second half of the month. By the end of the month, the CBSL has injected liquidity of over LKR 82 Bn through reverse repos.

The CBSL bought LKR 60 Bn worth of government securities (also known as money printing) on 3rd April. On the same day, the overnight liquidity spiked up by LKR 55 Bn to LKR 118 Bn. The CBSL went on to buy over LKR 50 Bn worth of securities on four more occasions during the rest of the month.

Liquidity in the money market remained high throughout April, especially after Sinhalese and Tamil New Year holidays, which pushed the liquidity surplus to over 120 Bn daily.

LKR 94 Bn worth of T-bills were issued during the month as opposed to LKR 115 Bn in the previous month. Although the auctions were oversubscribed, the accepted bids were lower than the offered amounts in all auctions in April. Yields in the primary market fell following the policy rate cut (3 months- 5 bps, 6 months- 30 bps, and 1 year – 40 bps) and remained largely unchanged for the rest of the month.

T-bill yields in the secondary market declined following the policy rate cut (3 months – 28 bps, 6 months – 34 bps, and 1 year -36 bps) with a slower pass-through and the volumes remain subdued throughout the month.

The yield differential between US 3m T-bill and LKR 3m T-bill declined marginally as the US treasury yields increased in April.

Long-term rates

Figure 2: Yield curve of government securities

Source: First Capital Research

The CBSL held two bond auctions in April and both were oversubscribed.  LKR 132 Bn worth of bonds were issued, highest so far for the year in a single month.

Despite the fact that secondary bond market activities were somewhat dull during the month (14% decline in volume), the yield curve shifted down across all maturities (mid tenor by 25-40 bps and long tenor by 25 bps).

Figure 3: Local and international lending rates

Notes: AWPR- Average Weighted Prime Lending Rate month average, AWLR, Average Weighted Lending Rate. LIBOR is the month open rate.
Source: CBSL and global-rates.com

AWPLR remained at upper single digit levels in April and displayed some volatility over the weeks. LIBOR continued to decline amidst the rate cuts by major central banks in the world. But with poor liquidity in London interbank market, Bank of England emphasized the need to replace LIBOR with alternative rates.

Read ICRA Lanka’s report on the implications of LIBOR transition for Sri Lanka.

No bids were received for floating rate SLDBs, likely due to market participants’ expectation of a further decline in LIBOR in time to come

External Sector

Figure 4: Exchange rate and outstanding forward volume

Source: CBSL

With exports, remittances, and tourist receipts falling to historical lows, rupee was facing immense downward pressure early April. Exchange rate displayed high volatility and heavy swings during the month. Rupee depreciated sharply to almost LKR 200/USD in 2nd week but towards the latter part settled around LKR 192/USD.

Capital flight continued from the debt market. Foreigners were net sellers of the government securities (LKR 17 Bn net selling). With the closure of CSE in April, the capital outflows from the equity market was contained.

Export demand for tea was strong. Some exporters reported payment delays as countries putting restrictions on capital to counter currency depreciation. Sri Lanka too imposed import restrictions on number of items on 16th April with the intention of countering currency pressure. As a result of low exports and import restrictions, the interbank forex volumes were greatly reduced in the last two weeks.

Outstanding forward volume was seen rising over the weeks as importers rushed to counter further depreciation. The forward rates that prevailed in the last week of the month indicates that the market is expecting the rupee to be depreciated by almost 2 rupees per USD in next 3 months.

Figure 5: Gross official reserves (Mn USD)

Source: CBSL

The reserve position improved marginally in April. Sri Lanka has over USD 1.6 Bn foreign currency obligations for next 3 months and USD 1 Bn SLISB maturing in early October. Any foreign inflows of funds received in the form of loans or grants may have also helped to ease the pressure on rupee.

Previous month the SLISB prices plummeted to all-time lows increasing the roll-over risk. In April prices recovered to some extent, but following the sovereign downgrade by Fitch, yields started to rise again. The SLDB auction held in April was also significantly undersubscribed.

Prices

Figure 6: CCPI (Y-o-Y)

Notes: WRI (100=2012), CCPI (100=2013)
Source: CBSL

Data indicates the inflation has declined to 5.2% in April. CSD has suspended fieldwork for data collection and currently compiling data based on online sources or by phone from alternative data sources. Growth in prices of food commodities is the main contributor to inflation. However, data showed a decline in rice and vegetable prices from March.

Stock Market

CSE was closed for the entire month which delayed the process of absorbing the COVID-19 shock.

In the meanwhile, US stocks rebounded sharply in April, fueled by improving sentiment. European markets were broadly higher. Asian markets also recovered on the back of rising global optimism. However, as the oil prices drifted lower, the markets lost the momentum.

Real Sector

Prices at the Colombo tea auction rose sharply in April amidst falling domestic production. This was largely attributable to the global supply shock from unfavorable weather conditions in most black tea exporting nations.

Read ICRA Lanka’s note on recent trends in tea prices.

The industry and services sector operated below capacity in April due to the confinement. The tourism industry grounded to a halt as travel restrictions were imposed. Trade sector was also affected due to import restrictions and exchange rate depreciation. In this backdrop, ICRA Lanka expects the real GDP of Sri Lanka in Q2 to record a contraction of around 4.5%.

Read ICRA Lanka’s report on the economic impact of COVID-19.

Outlook for May

With government signaling lifting of the lock-down measures, the activities in the real economy may slowly start to pick up. Both short and long-term interest rates are likely to remain low, amidst weaker credit demand. Further, depreciation of rupee is likely as forecasted by the forward rates. In this context, inflation is likely to be well within 4 to 6%.

Rating Actions

Following rating actions were taken by ICRA Lanka during the month of April.

Visit https://www.icralanka.com/ratings/ to read the rating rationales.

IssuerIssueActionPrevious RatingCurrent Rating
Softlogic HoldingsIssuer ratingOutlook revised to Negative from StableBBB+ (Stable)BBB+ (Negative)
Softlogic HoldingsLKR 2,000Mn (LKR Mn outstanding) senior, unsecured debentureOutlook revised to Negative from StableBBB+ (Stable)BBB+ (Negative)
UB FinanceIssuer ratingReaffirmedBB (Negative)BB (Negative)
Multi FinanceIssuer ratingReaffirmedB- (Negative)B- (Negative)

Abbreviations

bpsBasis points
CBSLCentral Bank of Sri Lanka
CSDCensus and Statistics Department
SLDBSri Lanka Development Bonds
SLISBSri Lanka International Sovereign Bonds
PMIPurchasing Managers Index

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Published date: 5/15/2020

Document #: meuapr20


Disclaimer

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