December: Manufacturing sector grew at a slower phase (4 points above threshold) while services sector continued its expansion (10 points above threshold). Government credit growth out phased private credit. Wages continued to grow with a subpar rate to inflation.
January: Corona virus fears upset the Asian equities while ASPI lost momentum (-3.25%). The total net foreign outflow was LKR 3 Bn. Significant decline in Chinese (15.3%) and European (-7.5%) tourists amidst virus outbreak caused the arrivals to drop by over 6% pushing the industry recovery further. Activities in the debt markets revived, however foreigners were exiting the market following the CBSL rate cut (LKR 6.5 Bn net outflows). Lending rates continued to decline while prime lending rates tended towards upper single digit level (9.69%). The policy rate cut resulted in the AWCMR declining by 9 basis points and helped to ease the yield rates of the government securities (50 basis points for most of the longer tenor instruments, 40 basis points for mid tenor instruments, and over 10 basis points for most of the short tenor instruments). Rupee depreciated by about 17 basis points mainly due to capital outflows, while the reserve position deteriorated by about USD 113 Mn. Inflation climbed to 5.4% as a result of increases in the prices of food items.
CBSL cut the policy rates on two occasions last year in the 2nd half to boost the credit demand. Private credit expansion continued in December, recording five consecutive months of positive growth. Private credit generally picks up in December due to the spike in festive spending. Government credit surpassed private credit possibly due to year-end bonus payments to the state sector employees. Credit expansion in both sectors show marginal increases compared to the same period last year.
The call rates in January displayed some volatility compared to the month before. In January there were two liquidity build-ups over LKR 40 Bn, first in the 2nd week and the other towards last week of the month just before the CBSL cut the policy rates. Shortly after the rate cut, the liquidit slumped to LKR 26Bn and the AWCMR dropped by nearly 50 basis points which brough it on par with September rates. Call and repo volumes also swelled following the rate cut. The CBSL was seen switching between repo and reverse repo auctions to inject LKR 152 Bn and mop up LKR 78 Bn from the money market.
The primary market remained relatively active with subscription exceeding two times the amounts offered in almost all weeks during the month. T-bill yields in the primary market continued to edge up. 3M and 6M saw 13 and 14 basis point increases in yields during the month.
LIBOR (USD 1 Y) rate rose during January amidst the easing tensio between US and China, but Corona outbreak impacted the Asian markets in general.
AWPR continued to decline steadily and currently is at single digit level due to heavy intervention from the CBSL. Foreign banks and larger local banks more or less offering single digit rates for their prime customers while the smaller banks still lag behind the pack by close to 100 basis points. AWLR showed a marginal decline in December slowly catching up to the AWPR.
Secondary bond market activities picked up in January. On net basis, the foreign ownership of government securities went up by close to LKR 4 Bn. However, the policy rate cut triggered a foreign investor exit from the market. Hence in the last week of the month a foreign outflow of over LKR 6.5Bn was reported.
The CBSL rate cut had an immediate effect on the yield rates of the government securities across the board causing the yield curve to shift down by more than 50 basis points for most of the longer tenor instruments, 40 basis points for mid tenor instruments, and over 10 basis points for most of the short tenor instruments. Possible correction of the yield rates is likely in February.
Rupee depreciated by about 17 basis points amidst capital outflows. Further depreciation is likely in the month ahead as forecasted by the forward rates.
With little intervention, the reserve position has also deteriorated in January by about USD 113Mn.
Prices & Wages
Wages grew by 4.6% in December but was still trailing behind the inflation level indicating eroding purchasing power. In January last year the wages recorded a growth of 8.7% (Y-o-Y) and it is likely that the wage growth in January would be close to or on par with the inflation.
Inflation climbed to 5.4% in January mainly due to an increase in food items, especially vegetables. Supply shock seemed to be driving this escalation. In addition, there was a marked increase in housing rentals. Downward adjustment of prices of services related items (telco, health, airfare, and internet) was also observed during the month as the effects of tax changes was still in motion.
Corona virus outbreak caused the Asian markets to remain bearish for the month. Sentiment in the CSE was also dull and ASPI lost over 3% on M-o-M basis. Foreigners were net sellers for six consecutive months and sold close to LKR 3Bn on net basis in January. All sectors, with the exception of Healthcare in the ASPI lost value in January. Noteworthy deterioration in value was observed in Investment Trust (-1047 index points), Banking and Finance (- 763 index points), Motors (-755 points), and Stores Supplies (-696 index points) shares.
Manufacturing expansion slowed in December. Production levels declined as the production cycle would end in January, giving way for build-up of stocks. Services sector picked up due to heightened activities in wholesale & retail trade and accommodation, and food & beverage sub sectors.
Tourist arrivals saw a decline of 6.5% in January on Y-o-Y basis pushing the full recovery of the industry further. Corona virus worries was the main contributor to this poor performance as witnessed by a slump in Chinese (-15.3%) and European (-7.5%) tourists.
Outlook for February
Private credit expansion to continue amidst modest activity in the real economy but supply disruptions from the Corona outbreak can persist. Wage growth recovery is expected. Tourism may remain muted delaying full recovery. Both short and long-term interest rates likely to show downward adjustment. Activity in debt and equity markets is expected to be moderated. Further depreciation of rupee is likely in February as forecasted by the forward rates. Inflation will remain around mid-single digit level.
Following rating actions were taken by ICRA Lanka during the month of January.
- 6th January: Reaffirmed long-term and shortterm ratings of First Capital Holdings PLC
- 22nd January: Withdrew the issue rating on the LKR 1,000 Mn guaranteed redeemable debentures of Orient Finance PLC.
- 22nd January: Janashakthi General Insurance Limited rating placed on notice of withdrawal.
Recent developments in the power sector in Sri Lanka is credit positive for mini-hydro producers that are currently operating. Read more…
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Published date: 2/14/2020
Document #: meujan
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