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
Call and repo rates were steady but the volumes moderated in February. T-bill yields in the secondary market saw ~10 bps hike as the CBSL relaxed yield caps during the primary auctions (Yield caps for 3M and 6M securities were absent since the second auction for February).
There was no auction based open market operations during the month. Despite adequate bid volumes, in all the primary auctions in February, the market failed to absorb intended treasury stocks. The CBSL stepped in and bought over LKR 73 Bn T-bills to its books over the course of the month. In the meanwhile, the net effect of payment of foreign currency obligations (USD 102 Mn) and the purchase of forex from the market by the CBSL (USD 72 Mn) may have drained over LKR 15 Bn from the money supply. As a result, the excess liquidity gradually reverted back to above LKR 150 Bn mark.
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 market showed interest in the fresh bond issue for the month. The CBSL offered LKR 125 Bn and accepted nearly LKR 100 Bn during the primary auctions. Secondary market bond yields rose 25-50 bps. ICRA Lanka observes that recent surge in treasury yields has been a global phenomenon. Many analysts attribute the rising inflation expectation as a key cause of this increase.
Figure 3: AWPR and 3M T-bill yield
Note: T-bill yield for secondary market
AWPR broadly remained around 5.75% in February except in the 2nd week where the rate dipped sharply to 5.59%.
In line with ICRA Lanka’s previous expectation, the private credit slowed down in January. The credit grew only by LKR 26 Bn with respect to December 2020, lowest month-on-month increase since July last year. Private credit generally tends to falter whenever the reserve money growth slows down. Hence, we expect the private credit to have grown slowly in February as well.
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
In the US, declining COVID cases and deaths and expedited vaccines rollout programme caused the US treasury yields to shoot-up. Falling unemployment and energy prices have also fed into the inflation expectations. Consequently, the yield curve, especially the mid-tenor securities, were seen steepening. But the yields moderated towards the month end as the Fed reassured its commitment to the bond buying programme (i.e. Quantitative Easing).
Yields on SLISBs rose in February with the nearest maturity (27-Jul-21) increasing by about 12 pps and tapering towards the longer end. ISBs that matures early next year also saw yields soaring by nearly 12 pps.
Figure 5: Exchange rate and outstanding forward volume
Merchandise exports fell 8.1% (Y/Y) in January to USD 924 Mn which while imports declined by 8.3% to USD 1.6 Bn. As a result, the trade deficit reduced by 8.5%. Worker remittances recorded a 16% increase to USD 675 Mn.
In January, The CBSL restricted outward remittances on capital transactions for six months in order to combat depreciation of the rupee. Capital fight continued in February but to a lesser extent than in January. Foreigners sold over USD 25 Mn equities and nearly USD 1 Mn treasuries during the month.
Total forex loans and interest due was around USD 102 Mn for February. The CBSL also announced that it has settled a USD 400 Mn swap with Reserve Bank of India. In addition, the CBSL bought over USD 27 Mn worth of forex from the market. This comes after the CBSL made it mandatory for commercial banks to sell 10% of the forex remittances to the CBSL. In this context, the reserves slid to USD 4.5 Bn by the end of the month.
Rupee depreciated by nearly three rupees during the first week of February amid heavy dollar purchases by the banks. In the subsequent weeks as the interbank forex volumes moderated, the rupee stabilized around 194 LKR/USD. In the meanwhile, interbank forward volumes continued to decline.
Figure 6: Gross official reserves (Mn USD)
Prices & Wages
Figure 7: CCPI and Nominal Wage Rate Index of the informal private sector (Y/Y)
Notes: WRI (100=2012), CCPI (100=2013)
Wages grew stronger above inflation in January on account of continued recovery of services and industrial sectors.
Inflation fell below 4% (i.e. lower bound of the CBSL’s inflation target) for the second straight month in February due to the higher base that prevailed around the same time last year. Inflation surpassed 6% in February last year as a result of an increase in prices of food.
Figure 8: ASPI (M/M)
Enthusiasm among the domestic investors evaporated as the markets closed with a 13.75% fall in the ASPI and a 15.6% in the S&P SL20. Plunge in equities was board based, a likely market correction, wiping out nearly LKR 520 Bn value from the market after making back-to-back steep gains in previous weeks. The CSE crashed several times after stocks saw sharp intra-day falls. During February, market PBV (Price-to-Book-Value) decreased from 1.44 to 1.22 favouring buyers.
Figure 9: GICS sector performance- February
|Sector||Index Points Gain|
|Food & Staples Retailing||-55|
|Commercial & Professional Services||-89|
|Healthcare Equipment & Services||-93|
|Household & Personal Products||-97|
|Food, Beverage & Tobacco||-114|
|Consumer Durables & Apparel||-167|
|Automobiles & Components||-205|
US markets rode on the prospects of economic recovery and decreasing number of COVID cases. Europe and emerging markets were also upbeat, recording solid gains sharing optimism over global recovery from the plight of COVID pandemic.
Figure 10: Crude oil price
Source: Bloomberg quoted in CBSL
Oil prices surged above USD 60 a barrel for the first time since January 2020 after Saudi Arabia cut oil production.
Figure 11: Tea (All Elevations) price and quantity sold at weekly auctions
Source: Forbes & Walker
Tea prices continued to recover in February while the production declined gradually.
Figure 12: Rubber price weekly auctions
Note: Price of Latex 4X
Rubber price was steady in February in the domestic auctions while spot prices in the global markets rose driven by soaring crude oil prices.
Figure 13: Gold price
Gold fell during February as investors were attracted to high yields of US treasuries. In addition, bullish equities drove investors away from gold.
Read ICRA Lanka’s report on the implications of rising commodity prices for Sri Lanka.
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.
Manufacturing sector continued to expand in January and February months as seen from the latest PMI data. New orders have slowed down while employment rose at a higher rate. The supplier delivery times continued to lengthen as a result of lower inbound ship traffic triggered by the import controls.
Services sector expanded and expectations for business activity enhanced as the mobility improved with individuals adapting to new normal. However, the employment continued to contract.
Read ICRA Lanka’s report on the outlook for Sri Lankan economy – 2021.
Outlook for March
Over 500,000 people in Sri Lanka have been vaccinated against the COVID-19 virus by early March . Early success in the vaccine rollout is crucial as this will be closely monitored by the international investors and the recovery of the real economy hinges on this.
It is unclear whether pressure for treasury yields to go up is triggered by inflation expectations or the prospects of economic recovery or both. In any case, it is important to keep the yields in check to drive the lending rates down. In this context, if the credit growth becomes weak in Q1, the CBSL will be on the spotlight as markets may anticipate some policy action in the next Monetary Policy Committee meeting early April.
China approved USD 1.5 Bn currency swap with Sri Lanka last week. This may help to restore confidence in the rupee and the SLISBs in the near-term.
There is no immediate sign of inflation taking off, but rising commodity prices and import restrictions may push up prices in certain sectors.
Following rating actions were taken by ICRA Lanka during the month of February.
Visit https://icralanka.wpengine.com/ratings/ to read the rating rationales.
|Issuer||Issue||Action||Previous Rating||Current Rating|
|Oxford College of Business (Pvt) Ltd||Issuer Rating||Assigned||N/A||[SL]BBB (Stable)|
|Multi Finance PLC||Issuer Rating||Revised||[SL]B- (Negative)||[SL] C+|
|Softlogic Finance PLC||Issuer Rating||Reaffirmed||[SL]BB- (On Watch)||[SL]BB- (On Watch)|
|Commercial Credit and Finance PLC||Guaranteed Redeemable Debentures Programme (LKR 2,000 Mn)||Assigned||N/A||[SL]AA(CE)|
|Commercial Credit and Finance PLC||Listed Guaranteed Subordinated Redeemable Debentures Programme (LKR 2,000 Mn)||Withdrawn||[SL]A+ (SO)||N/A|
|Windforce (Pvt) Ltd.||Issuer Rating||Assigned||N/A||[SL]AA- (Stable)|
|Softlogic Capital PLC||Issuer rating||Reaffirmed||[SL]BBB+ (On Watch)||[SL]BBB+ (On Watch)|
|Softlogic Capital PLC||Senior, unsecured, listed redeemable, debentures (LKR 1,500 Mn)||Reaffirmed||[SL]BBB+ (On Watch)||[SL]BBB+ (On Watch)|
|ASPI||All Share Price Index|
|CBSL||Central Bank of Sri Lanka|
|CSD||Census and Statistics Department|
|CSE||Colombo Stock Exchange|
|GICS||Global Industry Classification Standard|
|GoSL||Government of Sri Lanka|
|SLDB||Sri Lanka Development Bonds|
|SLISB||Sri Lanka International Sovereign Bonds|
|SOFR||Secured Overnight Financing Rate|
|PMI||Purchasing Managers Index|
|RRISL||Rubber Research Institute of Sri Lanka|
Xinhua Net, “Over 500,000 people vaccinated against COVID-19 in Sri Lanka,” 02 March 2020. [Online]. Available: http://www.xinhuanet.com/english/asiapacific/2021-03/02/c_139778159.htm.
 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.
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.