December 2019

Overview

November: Manufacturing and services sectors continued their expansion. Services sector was seen hiring staff expecting more activity in the peak season in December while manufacturing sector winded down production enhancing their stocks. Private credit expanded while government credit declined. After falling for four consecutive months, wage growth rebounded but was still under the inflation level indicating eroding purchasing power.

December: Tourist arrivals crossed 200,000 arrivals, just a 4.5% decline on Y-o-Y basis. Activities of the debt and equity markets were dull as investors took a step back. Long-term rates continued to decline but the short-term interest rates mostly remained flat. The yield curve went through a minor upward correction mainly in the short and mid tenor securities, but long-end declined marginally. Rupee depreciated by about 50 basis points mainly due to capital outflows while the reserve position improved by about USD 117 Mn. ASPI lost over 1% reversing the momentum gained during the 2nd half of the previous month. Foreign outflow from equities was LKR 978 Mn. Inflation climbed to 4.8% mainly due to increase in prices of food items.

Interest Rates

Short-term rates

November data showed private sector credit recording a positive growth for the fourth consecutive month and negative growth for government credit. December was expected to show a moderate growth in private credit. Call rate rose marginally in December till the last week but was maintained within the mid-level of the policy corridor. The liquidity edged up close to LKR 40 Bn by month end as a result of the CBSL liquidity injections. T-bill yields were seen increasing amidst lackluster demand in the market as characteristic of December.

Long-term rates

LIBOR (USD 1 Y) rate rose during December. The positive sentiments from the US-China trade truce kept the markets upbeat. On the local front, AWPR continued to decline steadily. In line with CBSL’s direction on the lending cap, the interest rates were set exogenously as opposed to market forces.

The yield curve went through a minor upward correction mainly in the short and mid tenor securities, but long-end declined marginally. The market activity turned sluggish towards the middle of the month causing the yields to rise ahead of the holidays. Foreign selling in government securities persisted for 3 weeks of December triggering a net foreign outflow of LKR 12 Bn by the 4th week. The bond market activity moderated as a result of continuation of policy corridor in the last week.

External Sector

Rupee depreciated by about 50 basis points mainly due to capital outflows. Further depreciation is likely in months ahead as forecasted by the forward rates.

With little CBSL intervention in the forex market, the reserve position improved by about USD 117 Mn in December.

Prices & Wages

After falling for four consecutive months, wage growth rebounded in November but was still under the inflation level indicating eroding purchasing power. This observation comes after the unemployment rate recorded a nine year high of 5.1% in 3Q of 2019. The wage growth recovery is expected to continue in December as well.

Inflation climbed to 4.8% in December mainly due to an increase in food items. Latter part of December saw prices of food and vegetables bidding up triggered by supply shocks.

Stock Market

The market is mostly remained dull during the month with few crossings contributing to turnover as the investors were on the sideline towards the holidays. ASPI lost over 1% reversing the momentum gained during the 2nd half of the previous month. Foreigners were the net sellers (LKR 978 Mn). Banks and Finance Institutes, and Oil Palms were the top gainers for the month while Telecos, Stores Supplies, Manufacturing, Footwear and Healthcare were the top losers.

Real Sector

Manufacturing activities continued its slow expansion in November as well. Manufacturers winded down production and enhanced stocks as the demand declined. Services sector also expanded at a slower phase in November and was seen hiring in expectation of more activities in December. Tourist arrivals indicated further recovery in December crossing 200,000 arrivals, just a 4.5% decline on Y-o-Y basis. The largest source market for tourists in December was India, followed by the United Kingdom and Russian Federation.

Outlook for December

Private credit demand to continue amidst modest activities in the real economy. In line with this, wage growth recovery is expected. Tourist arrival gap is expected to shrink further. Long-term interest rates may show further downward adjustment. Activity in debt and equity markets is expected to improve. Further depreciation of rupee is likely in January as forecasted by the forward rates. Inflation will remain around mid-single digit level.

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Lalinda Sugathadasa
Head of Research & Business Development
Call: +94 77 478 1343
Email: research@icralanka.com

Published date: 17-Jan-2019
Document #: meudec

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