June 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

Driven by the uncertainty of the third wave of the pandemic, call and repo rates rose up over 20 bps during the course of the month amid tightening liquidity. The market volumes remained elevated. The CBSL regularly added liquidity via purchasing treasuries at the primary auctions. In addition, it added over LKR 200 Bn (which claimed to be a provisional advance) towards the tail-end of the month before withdrawing the next day. The open market purchases of forex by the CBSL have also injected close to LKR 7 Bn (USD 33 Mn). Standing Lending Facility (SLF) was seen being utilized more intensely averaging around LKR 40 Bn a day during the month.

The T-bill yields in both primary and secondary markets edged up during June with secondary market recording moderate volumes. The CBSL continued to maintain the yield cap on one-year notes but relaxed the same to 5.23% during the last auction of the month. Bid acceptance ratios for 6M and 12M notes were strikingly low.

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

Healthy demand was observed for fresh bond issues during the month. The volumes in the secondary market were moderate. In the meanwhile, the shorter-end and belly of the yield curve shifted up marginally.

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

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

With tightening liquidity in the money markets, the AWPLR was seen rising during June by about 20 bps.

Private credit growth was moderate in May expanding by over LKR 55 Bn possibly as a result of the rapid escalation of the pandemic situation in the country. The reserve money grew stronger in the last two weeks of June likely due to expansion in the money in circulation. Therefore, we expect the moderation in private credit to have continued through June as well.

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

The US treasury market was rattled when the Fed announced that they are forecasting hikes in 2023 – a move which the Fed initially said would not initiate until at least 2024. However, the Fed’s reassurance that it would be patient before tapering the QE programme helped to keep the market liquid. Eurodollar rates slid in June.

The CBSL allowed the banks to buy SLISBs with fresh funds on 16th June. Yields on SLISBs jumped over 9 pps in the last week of June compared to end May.

External Sector

Exports marginally went up to USD 892 Mn while imports dropped to USD 1.7 Bn from the month-ago levels in May. Concurrently, workers’ remittances grew by 6.5% to USD 460mn (Y/Y).

Figure 5: Gross official reserves (Mn USD)

Source: CBSL

The CBSL offered USD 100 Mn during the SLDB auction held in June, but investors showed lackluster buying interest. The CBSL bought USD 33 Mn forex from the open market. The reserve position essentially remained flat in June compared to May.

Figure 6: Exchange rate and outstanding forward volume

Source: CBSL

Both interbank spot and forward markets were dull. Outstanding forward volumes declined. Forward premiums remained inverted during the month.

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 jumped to 7.2% in May as a result of the lower base that prevailed around the same time last year. This is driven by the recovery in services and industrial sector wages.

Headline inflation increased to 5.2% in June, biggest jump since the beginning of the pandemic last year. The increase is due to the hike in fuel prices which has caused a broad-based increase in prices of both food and non-food items.

Equities

Domestic Market

Figure 8: ASPI (M/M)

Source: CSE

The performance of the CSE was mixed in general during the month of June as the market closed with a 5.87% gain in the ASPI and a 0.35% loss in the S&P20. Foreign investors were net sellers, however the overall net outflow decreased substantially to LKR 1.16 Bn from LKR 3.8 Bn. Majority of GICS sectors were able to record gains with the best performing sectors being transportation and Diversified Financials. Overall PBV (Price-to-Book-Value) decreased from 1.14 to 1.12 favoring buyers.

Figure 9: GICS sector performance- June

SectorIndex Points Gained
Transportation713
Diversified Financials512
Household & Personal Products121
Commercial & Professional Services57
Real Estate33
Food, Beverage & Tobacco24
Food & Staples Retailing21
Materials9
Consumer Services6
Retailing5
Banks3
Energy3
Insurance-3
Utilities-9
Automobiles & Components-9
Consumer Durables & Apparel-17
Capital Goods-36
Telecommunication Services-43
Health Care Equipment & Services-101

Source: CSE

Global Markets

US stock markets remained upbeat regardless of rising inflation and the Fed being more ‘hawkish’ on inflation. While majority of the sectors experienced gains in June, anticipation regarding second-quarter corporate earnings is expected to drive prices further up. European markets edged higher with France, Germany and UK being the top performers.

Commodities

Figure 10: Crude oil price

Source: Bloomberg quoted in CBSL

Global brent crude oil continued to maintain a strong upward momentum throughout the month of June as it reached three-year high. The prices continue to be influenced by strong demand from USA, Europe and China. However, disagreement among OPEC+ countries regarding increasing supply has been the main reason behind the rising oil prices.

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

Source: Forbes & Walker

Tea prices continued to fall in June. Market sources informed ICRA Lanka that, the buyers are in a strong footing to negotiate the prices down as the global supply soars with the recovery in production activities in key source markets.

Figure 12: Rubber price weekly auctions

Note: Price of Latex 4X

Source: RRISL

Prices in the Colombo auction remained flat in June. Global rubber prices lost momentum largely due to lack of demand from India and China which are the largest consumers. However, demand is expected to pick up in the upcoming months as global economies return to normalcy.

Figure 13: Coconut price weekly auctions

Source: CDA

Coconut prices plummeted in the Sri Lankan auctions likely as a result of drop in nut quality owing to adverse weather conditions.

Figure 14: 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 which have been gaining momentum in the last few months, slipped 7% in June after the Federal Reserve’s indication of twin interest rate hikes by 2023.

Global base metal prices continued to rise in June fueled by the post-pandemic recovery. Markets cooled after China announced that it is planning to release its copper, aluminum, and zinc reserves [1].

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

Real Sector

Figure 15: 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 both services and manufacturing sectors showed more or less a continuation of the impact of the pandemic for another month. Logistical delays in securing supplies were persistent. However, the relaxation of the lockdown measures helped the services sector activities to marginally improve. 

Outlook for July-August

Current vaccination drive is likely to speed up the recovery in the real sector. Therefore, higher economic activity levels are expected for July/August.

We expect moderate level of inflation in July as well with the increase in fuel prices working its way into more sectors of the economy.

The vaccination rollout is likely to give a boost to the business sentiment and the consumer confidence and hence private credit in July may expand slightly faster on month-on-month basis than in June.

Falling prices of Sri Lanka’s key export commodities and increasing industrial input prices will continue to pose a significant challenge to the external sector.

Rating Actions

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

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

IssuerIssueActionPrevious RatingCurrent Rating
Vidullanka PLCIssuer RatingReaffirmed[SL]A- (Stable)[SL] A- (Stable)
Vidullanka PLCCommercial Paper Program (COR/IR/15/08) (LKR 100 Mn)Reaffirmed[SL]A2+[SL]A2+
Vidullanka PLCCommercial Paper Program (COR/IR/20/01) (LKR 100 Mn)Reaffirmed[SL]A2+[SL]A2+
LOLC HoldingsProposed Senior Unsecured Unlisted Rated Redeemable Debenture Programme (LKR 2000 Mn)AssignedN/A[SL]A (Stable)

[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.