November 2019


Activities in the economy improved post presidential election driven by positive sentiments from the local investors. Bourse saw gains especially in Manufacturing, Trading, Power & Energy, and Beverage, Food, & Tobacco sectors. Demand for government securities surged causing the yield curve to push down easing off the cost of borrowing for the government. In this backdrop, exchange rate appreciated notably in the second half of the month. However, the weaker external condition that prevailed during the first half of the month caused the reserve position to weaken. Foreigners were seen exiting debt and equity markets by exploiting on the heightened local investor sentiment. CBSL injected liquidity for the most part of the month trying to drive call rates down. Manufacturing sector is expected to pick up in November to meet the upcoming festive season demand. Consequently, wages may have grown faster than the inflation rate in the same month. Tourism sector showed further recovery. The long-term interest rates continue to decline as a result of the lending cap. Inflation also declined as a result of slowdown in prices of both food and nonfood items.

Interest Rates

Short-term rates

Call rate continued to rise marginally in November on the back of rising demand for credit from the private sector ahead of the festive season. CBSL was seen injecting liquidity till the last week of the month to moderate the effect. In this background, CBSL held the policy rates unchanged for December.

Recent developments have helped to push down the rates on government securities helping to ease off the borrowing cost for the government. T-bill yields in the secondary market continued to decline as secondary market activity peaked following the presidential election.

Long-term rates

Interest rates in the international markets decreased marginally as Fed cut the policy rates in the previous month. On the local front, AWPR continued to decline steadily. In line with CBSL’s direction on the lending cap, the interest rates are set exogenously as opposed to market forces. With the recent reduction in taxes, the lending rates may further subdue in December.

The yield curve experienced a sharp downward shift across the board following the Presidential Election with heightened activity levels in the bond market but in subsequent weeks yields went through a minor upward correction. Foreigners were seen buying bonds prior to the election and exiting by exploiting on the heightened local investor sentiment. Fall of shorter tenor bond yields have steepened the yield curve indicating investors’ expectation about economic recovery in the medium to long run.

External Sector

Generally, in November exports gets weaker while imports can peak up leading to pressure on rupee. Rupee was seen depreciating till the mid-month and subsequent to the Presidential Election, experienced a sharp appreciation against US$ with minor moderation towards the month end.

Rupee is expected to depreciate but also to maintain some momentum in December amidst the downward pressure. Exports generally pick up in December which can strengthen the rupee.

Source: CBSL

Reserve position declined by about US$ 259 Mn in November as a result of weakening of rupee in early November.

Prices & Wages

Growth of price levels of both food and non-food categories decelerated resulting in inflation declining to 4.4% in November. Wage growth shows a definite downward trend and is expected to moderate in November. In both September and October months wages growth is lesser than the inflation level indicating eroding purchasing power.

Stock Market

Investors rallied towards mid-month and bourse picked up post-election. Foreigners were seen exiting the market on the back of a stronger currency and buying interest from local investors. However, CSE lost momentum in the last week of November.

Manufacturing, Trading, Power & Energy, and Beverage, Food, & Tobacco sectors were the main contributors for ASPI performance in the month reflecting improving economic activities in the real sector.

Real Sector

Manufacturing activities generally pick up in November to meet the upcoming festive season demand. Tourist arrivals indicate faster recovery. Europe became the largest source of tourist traffic in November. December is generally a peak month and the arrivals are expected to cross 200,000. With this development, we expect service sector to perform relatively well in December.

Outlook for December

December is generally a weak month for equities and we do not expect much movement in stocks. Debt market may also experience less action as the holiday season starts. Rupee is expected to depreciate but maintain some momentum in December amidst the downward pressure as exports pick up. If the rupee can hold its strength, we expect the reserve position to improve in December. Long term interest rates are likely to experience further decline.

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Published date: 16-Nov-2019

Document #: meunov

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