April 2021

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 – simple average of daily repo rates
Source: CBSL

Decline in the excess money market liquidity continued onto mid-April with a short-lived liquidity spike in between driving the call and repo rates up amid healthy volumes. The spike was caused by the CBSL’s purchase of treasuries (LKR 29 Bn) on 6th April which was subsequently neutralized by a settlement of forex payment (LKR 31 Bn drain on money supply) by the CBSL. During the second half, the liquidity gradually moved up as a result of the CBSL’s purchase of forex (LKR 13 Bn addition to the money supply) from the market and disbursement of Foreign Currency Term Financing Facility (FCTFF) from China.

Squeeze in the liquidity that prevailed during mid-March to mid-April forced a bank or some banks to borrow through the Standing Lending Facility (SLF), temporarily adding about LKR 30 Bn a day on average to the money supply. Given the substantial spread between SLF and the call rate and relatively large excess liquidity in the money market, this is somewhat surprising. The fact that the CBSL did not inject liquidity via a reverse repo auctions after such a persistence SLF usage  indicates that this was probably not due to a systemic issue.

The CBSL cut the yield cap on one-year notes by 6 bps and the yields in the primary auctions saw about 6-to-7 bps increase during the month. T-bill yields in the secondary market also continued to rise (3M – 12 bps, 6M – 11 bps, 12M – 5 bps). The volumes in the secondary market remained heightened. One-year T-bills had the lowest bid acceptance ratio (i.e. bids accepted/bids received) as a result of the yield cap. The CBSL has increased the offered amount recently in weekly auctions to ensure its target absorption levels are met.

Long-term rates

Figure 2: Yield curve of treasuries

Notes: Yields are based on the weekly average prevailed at the last week of the month, Shorter end – less than 2Y, mid/intermediate tenor – 2 to 10Y, longer tenor – above 10Y, Source: CBSL

Market showed lukewarm appetite for fresh treasury bond issues in April. As a result, significant quantity of bond issues was left unabsorbed. However, the secondary market activity level rose from the second week of April recording the highest monthly volume since February 2019. This was triggered by the drop in the liquidity in the money markets coupled with expectation for continued rise in yields. Market-wide selling interests shifted the yield curve up, especially the at mid-tenor (15-to-25 bps) range.

The CBSL held the policy rates in its April Monetary Policy Committee (MPC) meeting and formally acknowledged that there is some upward pressure on yields on government securities in contrast to its monetary policy expectations [1]. ICRA Lanka has been commenting on this trend since the release of its December 2020 Monthly Economic Update.

Figure 3: AWPR[1] and 3M T-bill yield

Note: T-bill yield for secondary market, Source: CBSL

AWPR displayed volatility in April, but ended the month 11 bps higher than the last week of March.

In line with our expectations, private credit maintained its momentum in March (LKR 112 Bn increase from February, highest monthly expansion since March last year).

During festive season, reserve money tends to expand faster but private credit may not necessarily expand commensurately. Therefore, though the reserve money expanded in April on both M/M and Y/Y basis, we expect the private credit growth to moderate in April.

Read ICRA Lanka’s report on the impact of low interest rates on the markets.

International rates

Figure 4: Month open international lending rates

Notes: The SOFR Averages are compounded averages of the SOFR over rolling 180-calendar day periods.

Source: New York Federal Reserve and global-rates.com

US treasury market had a wobbly month in April amid rising inflation fears. March CPI and PMI data in US flamed the inflation fears driving yields higher. The Fed pushed back on the speculation on tapering of QE to calm the markets and also dismissed the inflation fears calling the recent trends to be transitory.

Eurodollar rates remained mild. USD LIBOR (6M) was flat but SOFR (6M) declined further by about 2 bps.

Yields on the nearest-dated SLISBs (maturities in July this year) deteriorated in April while other ISBs recorded solid gains of over 100 bps after Sri Lanka signed FCTFF with China.

The SLDB auction held during April saw a modest level of demand. However, yields rose by about 70-to-80 bps from the January auction. The CBSL did not offer floating rate notes during this auction.

External Sector

Merchandize exports in March exceeded USD 1 Bn [2] on the back of recovery in key export destinations and rising commodity prices. In the meanwhile, worker remittances grew 17% to USD 612 Mn in March.

Apart from a minor inflow (USD 2 Mn) of capital to treasuries, the foreign participation remained almost nonexistent in April. On the other hand, foreign capital outflow (USD 19 Mn) continued in the equities market.

Figure 5: Gross official reserves (Mn USD)

Source: CBSL

Reserve position improved by about USD 400 Mn by the end of April helped by the disbursement of the FCTFF and purchase of forex from the market (~USD 63 Mn). Total foreign currency obligations due for April was around USD 157 Mn.

Figure 6: Exchange rate and outstanding forward volume

Source: CBSL

Rupee continued to depreciate in the early half of April reaching its peak on 8th April to over LKR/USD 200 before abruptly appreciating close to LKR/USD 192 on 20th April. Then it corrected back near to LKR/USD 200. Interbank forex volumes were slightly up from the March levels.

Outstanding forward market volume continued to decline amid restrictions in place for forward contracts. Daily forward volumes were also down from March. April ended with slightly inverted forward premiums for 1M contracts.

Prices & Wages

Figure 7: CCPI and Nominal Wage Rate Index of the informal private sector (Y/Y)

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

Wage growth retreated in March on account of strong performance in the services and industry sectors. Nevertheless, wages in the agricultural sector recorded dismal growth.

Headline inflation recorded a marginal decrease from March to 3.9%. Food inflation remained close to double digits while non-food inflation remined just below 2%. The CSD has been imputing missing prices since the beginning of the pandemic which may affect the index’s representativeness of the general price level of the economy.

Equities

Domestic Market

Figure 8: ASPI (M/M)

Source: CSE

The CSE gained momentum in the first half of April touching two-month high on 15th April before losing much of the gains by month-end, only to close with just 1.22% and 0.65% advances in the ASPI and S&P20 respectively. Foreign investors were mostly on the sell side. However overall net foreign outflow was lower compared to previous months. Around half of the GICS sectors recorded gains with the best performing sector being Transportation. Overall PBV (price-to-book-value) remained unaltered.

Figure 9: GICS sector performance- April

SectorIndex Points Gain
Transportation333
Materials117
Household & Personal Products81
Automobiles & Components80
Consumer Durables & Apparel70
Capital Goods55
Diversified Financials44
Health Care Equipment38
Retailing31
Commercial & Professional Services-4
Food Beverage & Tobacco-6
Consumer Services-7
Utilities-10
Telecommunication-14
Food & Staples Retailing-18
Banks-23
Real Estate-26
Energy-27
Insurance-77

Source: CSE

Global Markets

US markets experienced a sharp rally during the month of April due to a series of robust economic reports, healthy corporate earnings, and a jump in retail sales. European markets remained upbeat as vaccine rollouts manifested signs of success. Asian markets however, slipped due to rising COVID cases.

Commodities

Figure 10: Crude oil price

Source: Bloomberg quoted in CBSL

Brent crude oil prices slipped marginally in April as a result of the escalation of the pandemic in certain parts of the world and its impact on the future oil demand. Prices however, exhibited an overall recovering trend and averaged around USD 64/bbl riding on the vaccine success optimism in advanced economies. In addition, supply constraints brought about by the OPEC+ countries helped to lift the prices. However, production is likely to increase in May and June on account of the revised global economic outlook.

Figure 11: Tea (All Elevations) price and quantity sold at weekly auctions

Source: Forbes & Walker

Global tea prices experienced an increase during the start of April, as a result of bulk buying due to potential supply restrictions from India amidst surging COVID cases. However, prices moderated towards the end of the month.

Figure 12: Rubber price weekly auctions

Note: Price of Latex 4X

Source: RRISL

Falling global rubber prices continuing from March bottomed out towards the middle of April, but has hence recovered on account of surging demand from China as well as supply constrains from India.

Figure 13: Metal price index (2016=100)

Notes: Base metals index includes Aluminum, Cobalt, Copper, Iron Ore, Molybdenum, Nickel, Tin, Uranium, and Zinc, precious metals index includes Gold, Silver, Palladium, and Platinum

Source: IMF

Gold prices gradually surged in April to its seven-week peak of around USD 1790/oz as US treasury yields slipped. In addition, investors saw opportunity to stack up their gold portfolio as prices dropped recently.

Robust demand kept the base metal prices buoyant. Towards the end of March Base metal prices were almost 70% higher than what they were around the same time last year. Factors such as strong demand from China, ongoing global economic recovery, supply disruptions and weaker US dollar have resulted in record high prices of base metals lately.

Read ICRA Lanka’s report on the implications of rising commodity prices for Sri Lanka.

Real Sector

Figure 14: PMI deviation from point of neutrality (Index points)

Notes- negative values indicate sector is generally contracting on a month-on-month basis while positive values indicate the sector is expanding. The strength of contraction or expansion is manifested by the magnitude of the figure. Source: CBSL

PMI for manufacturing and services recorded the highest index value since June last year indicating stronger recovery in March. We expect services sector to have a stronger expansion while industry sector to record a moderate expansion in April. Right after the New Year holidays, COVID cases spiked triggering the third wave of infections which grimed the future outlook for the businesses.

Outlook for May

The top priority for the country at the moment is to get the pandemic situation under control. Inoculation numbers, daily tests, daily infections and daily deaths are key indices to keep an eye on.

The expansion in the services sector experienced lately is expected to be disrupted somewhat in May and beyond as diminished mobility and loss in consumer confidence will be impacting the revenues. Industrial sector, on the contrary, has shown resilience during the previous waves, and therefore expected to perform better than the services sector.

Pandemic induced supply shocks together with import controls may further fuel inflation fears. The investors may keep factoring this in the treasury market leading to continued pressure on the yields in the near term.

Financial institutions may reevaluate their risk appetite if the pandemic situation keeps escalating which could affect the credit growth.

Recovery in the major export market will help to keep the exports around USD 1 Bn mark. But rising commodity prices will make it difficult to keep a lid on the trade deficit.


[1] AWPR is calculated based on the submissions made by the commercial banks to the CBSL on the rates offered to customers who borrowed more than LKR 10 Mn for less than three months.


Disclaimer

This publication has been prepared by ICRA Lanka solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ICRA Lanka does not represent that it is accurate or complete. ICRA Lanka does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication.