December 2020

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

AWCMR rose marginally up as the market activity level declined significantly in the second half of December. However, the repo market continued to operate with somewhat modest volumes during the said period.

On 1st of December the CBSL issued LKR 50 Bn new money against treasury securities which effectively lifted the overnight excess liquidity by the same amount. Then throughout the month the excess liquidity levels remained above LKR 200 Bn. Meanwhile, the CBSL continued to purchase treasuries from primary auctions, but in relatively smaller quantities. On 30th the CBSL added LKR 242 Bn to the money supply, but on the next day withdrew close to LKR 160 Bn by selling its treasury holdings causing the overnight liquidity to drop by LKR 25 Bn.

All primary auctions during the month were left partially filled (intentionally) despite being oversubscribed – a policy recently adopted by the CBSL which appears to have stemmed from the key tenets of the Modern Monetary Theory. The CBSL increased the yield caps gradually and allowed the T-bill yields in the primary market to go up ~5 bps during the month. There seemed to be pressure for 3M T-bill yields to rise further as seen from significantly low quantity of bids accepted (LKR 510 Mn) during the last auction of the month. The secondary market T-bill market volumes rose keeping the yields steady. 

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

The CBSL left the bond auction partially filled in December to enforce yield caps. The yield caps were first introduced for bond auctions in May while for bills it was introduced back in April. The yield curve remained almost unaltered. Secondary bond market had relatively weaker volumes.

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

Note: T-bill yield for secondary market

Source: CBSL

AWPR began to rise as the month wore on causing the spread against 3M T-bill to expand. This may have been triggered by the fears of global spread of the UK COVID-19 variant.

Private sector credit expanded in November in line with ICRA Lanka’s expectation and we expect December also to have a positive credit growth. Government sector credit continued to expand in November.

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 Treasuries had a rocky ride during the 1st half of the month which ended with a holiday week of Christmas. Uncertainty surrounding the US COVID relief bill, rising COVID cases, and fears of no-deal BREXIT scenario drove the yields down. Newly discovered UK Coronavirus variant initially sparked ‘return-to-safety’ mentality among investors but hopes of vaccines’ ability to fight it moderated worries somewhat. US relief package brought some level of confidence to the market just before the Christmas week, but investor sentiment was subdued as the proposal for USD 2,000 direct payments was stalled in the Senate.

Reflecting increased market risk due to global slowdown, Eurodollar rates inched higher. LIBOR, coined as the most important number in global finance, was planned to be phased out at the end 2021. But in November the benchmark administrator expressed that it might extend the retirement date for 3-, 6- and 12-month USD LIBOR rates until late June 2023.

Yields on sovereign bonds gradually climbed up during December. Bonds with the nearest maturity (27-Jul-21) saw yields go up by ~625 bps while longest maturity (28-Mar-30) bonds saw yields increasing by ~20 bps. This came amidst Sri Lanka’s long-term sovereign credit ratings being downgraded to CCC+/C from B-/B by S&P Global Ratings [1]. In the meantime, in order to put a stop to buying frenzy by local commercial banks and National Savings Bank of ISBs which were selling at a deep discount, the CBSL imposed a ban for 3 months.

External Sector

Figure 5: Exchange rate and outstanding forward volume

Source: CBSL

Export sector took a blow in November due to the surge in COVID cases around the world while remittances remained modest.

Following the S&P downgrade, foreign investors sold over LKR 1.7 Bn (~USD 9 Mn) treasury securities. At the same time, in the equity market net foreign selling amounted to LKR 3 Bn (~17 Mn). Close to USD 170 Mn foreign currency loan obligations were paid down during December[2].

Interbank FX market remained subdued while the forward volumes began to decline. Rupee experienced sharp depreciation in the second half of the month, a likely result of weaker FX inflows from exports compounded by the rating downgrade. The CBSL stepped in to bring the situation under control. In a statement the CBSL said that it would “take appropriate action aggressively hereafter’ to contain this volatility in the domestic foreign exchange market”. Accordingly, over USD 22 Mn was sold out of the reserves in December to curb the depreciation of the rupee.

Figure 6: Gross official reserves (Mn USD)

Source: CBSL

Prices & Wages

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

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

Source: CBSL

Wage growth rebounded in November but remained under inflation. CCPI continued to rise on account of rise in non-food inflation.

Equities

Domestic Market

Figure 8: ASPI (M/M)

Source: CSE

CSE maintained momentum in December recording over 8% gain in ASPI while liquid S&P recording over 7% gain. MoU signed between Browns Investments and CHEC for USD 1 Bn mixed development project in the Port City, official 3Q GDP data showing recovery, and prospects of a national vaccine programme sponsored by WHO kept the market upbeat which would otherwise be muted typically in December. The market PBV (Price-to-Book-Value) increased from 1.05 to 1.13 favouring the sellers.

Nearly all sectors recorded gains, but the largest gains were made in the transport, Healthcare and Service sectors

Figure 9: GICS sector performance- December

SectorIndex Points Gain
Transportation325
Healthcare Equipment & Services301
Household & Personal Products187
Materials132
Retailing99
Energy99
Insurance94
Food, Beverage & Tobacco88
Capital Goods79
Consumer Durables & Apparel76
Food & Staples Retailing69
Real Estate47
Diversified Financials45
Consumer Services35
Telecommunication Services34
Banks31
Utilities29
Commercial & Professional Services-6
Automobiles & Components-98

Source: CSE

Global Markets

Rollout of multiple vaccines, an exit agreement between the European Union and the U.K. and signing of US fiscal relief bill helped the global markets to remain upbeat in December. Emerging market equities also recorded gains.

Commodities

Figure 10: Crude oil price

Source: Bloomberg quoted in CBSL

Oil prices continued to rise on the back of confirmation of the congress relief bill, Brexit trade agreement and hopes for faster distribution of vaccines.

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

Source: Forbes & Walker

Tea prices edged lower during the month of December. Buyers rushed to buy stocks in the last two auctions before the market closure for the holiday season resulting in spike in quantity sold.

Figure 12: Rubber price weekly auctions

Note: Price of Latex 4X

Source: RRISL

Rubber prices declined in December, likely due to oversupply amidst weakening demand.

Figure 13: Gold price

Source: CBSL

International gold prices rebounded from November lows to 3-month high during in December. Uptick in seasonal demand (Christmas and New year) and inflation expectation post pandemic could be driving the demand for gold.

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

Latest PMI data indicates the manufacturing sector recovering in November, but the services sector continued to contract for the second month. In the manufacturing sector, production levels and new orders were improving but stock purchasing and employment was still weak. The services sector continued to expand employment while expectation for activities improved. However, the backlog of work and business activities continued to deteriorate. 

Outlook for January

2021 began with large scale roll out of vaccine programmes in advanced economies. Early success of the efficacy of these programmes is likely to drive the markets, global and domestic alike.  However, with new lockdown measures coming into effect in many countries around the world, global demand may continue to remain fragile. Sri Lanka’s external vulnerability remains a key concern. Investors will keep a close eye on the current account and capital inflows.

Rating Actions

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

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

IssuerIssueActionPrevious RatingCurrent Rating
DFCC Bank PLCIssuer RatingAssignedN/A[SL]AA- (Stable)
Sarvodaya Development FinanceIssuer RatingWithdrawn[SL]B (Negative)N/A
LOLC Holdings PLCIssuer RatingReaffirmed[SL]A (Stable)[SL]A (Stable)
LOLC Holdings PLCCommercial Paper Programme (LKR 3,000 Mn)AssignedN/A[SL]A1 assigned
LOLC Holdings PLCListed Senior Unsecured Redeemable Debenture Programme (LKR 5,000 Mn)Reaffirmed[SL]A (Stable)[SL]A (Stable)
LOLC Holdings PLCListed Senior Unsecured Redeemable Debenture Programme (LKR 2,750 Mn)Reaffirmed[SL]A (Stable)[SL]A (Stable)
LOLC Holdings PLCProposed Listed Senior Redeemable, Debenture Program (LKR 6,500 Mn)AssignedN/A[SL]A (Stable)
ACL Cables PLCIssuer RatingReaffirmed[SL]A+ (Stable)[SL]A+ (Stable)
SMIB BankIssuer RatingReaffirmed[SL]BBB+ (Stable)[SL]BBB+ (Stable)
Commercial LeasingIssuer RatingReaffirmed[SL]A (Stable)[SL]A (Stable)
Commercial LeasingListed Senior Unsecured Redeemable Debenture Programme  (LKR 5,000 Mn)Reaffirmed[SL]A (Stable)[SL]A (Stable)
Commercial LeasingListed Senior Unsecured Redeemable Debenture Programme (LKR 5,000 Mn)Withdrawn[SL]A (Stable)N/A
LOLC Development Finance PLCIssuer RatingReaffirmed[SL]A- (Stable)[SL]A- (Stable)
LOLC Finance PLCIssuer RatingReaffirmed[SL]A (Stable)[SL]A (Stable)
LOLC Finance PLCListed Subordinated Unsecured Redeemable Debenture Programme (LKR 3,500 Mn)Reaffirmed[SL]A (Stable)[SL]A (Stable)
Janashakthi PLCIssuer RatingReaffirmed[SL]BBB- (Negative)[SL]BBB- (Negative)
Janashakthi PLCSenior Unsecured Redeemable Debenture Programme (LKR 1,000 Mn)Withdrawn[SL]BBB- (Negative)N/A
Panasian Power PLCIssuer RatingWithdrawn[SL]A- (Stable)N/A



[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.

[2] Based on the available data as of 15th December, there was around USD 8 Bn FX loans were pending for December. However, latest CBSL data show just over USD 170 Mn FX loan payments were expected to be paid for the same period. Therefore, we deduce that the GoSL may have taken a short-term emergency loan(s) somewhere between mid-November to December.


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.