November 2020

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

Money market rates indicated rising trend in November despite soaring liquidity levels. The month opened with a sharp decline in excess liquidity at the end of October, likely as a result of an FX payment. This boosted the interbank call volumes to pre-crisis levels. Repo market also saw modest volumes. The daily excess liquidity levels reverted to LKR 185 Bn with the CBSL injecting close to LKR 80 Bn via purchase of treasuries. In addition, the CBSL injected LKR 30 Bn via term reverse repos.

ICRA Lanka previously suspected (in September issue) asymmetry in liquidity among the market participants and it is now ascertained as per the CBSL’s recent publication [1] that it was indeed the case since September. Accordingly, term reverse repos were employed to provide liquidity to standalone primary dealers.

With the recent comments by the CBSL governor on the debt sustainability, ICRA Lanka expects the CBSL actions to have some alignment with key tenets of the Modern Monetary Theory (MMT) [2]. This means that it is likely that the stock of treasury securities held by the CBSL to expand significantly beyond current levels (LKR ~570 Bn as of end November). In addition, ICRA Lanka expects the CBSL to continue with private placement of treasuries.

Both primary and secondary T-bill yields rose during the month by about 5 -10 bps. All T-bill auctions were oversubscribed but almost all were partially filled. The secondary T-bill market volumes were weak while the bid-ask spreads were steady.  

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

Only a fraction of the amount offered was filled by the CBSL during the bond auction held in November. Secondary bond market volumes were also thin and operated with wider bid-ask spreads. Yield curve shifted up with a steeper angle indicating future economic activities amidst prospects of a viable vaccine.  

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

Note: T-bill yield for secondary market

Source: CBSL

Economic disruptions caused by the 2nd wave of infections put pressure on the AWPR in early November, but eased off during the second half of the month. The spread against 3M T-bill yield declined by the month end.

Private sector credit expanded in October in line with ICRA Lanka’s expectation while the government credit continued to accelerate. For November also, we expect the private sector credit to further expand.

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

Initial bullish reaction to the prospects of a Democratic sweep faded as it became increasingly likely that congress will be divided. US treasuries struggled to find direction as the election results kept the market in suspense. Yields surged after the announcements of Pfizer and Moderna on vaccine success rates but later moderated as the virus cases continued to rise apace in US and Europe. The hopes of Fed tweaking its asset purchase programme to include longer-dated bonds played favourably for treasuries.

Month open 6M LIBOR USD rate fell marginally while its’ replacement rate, SOFR, edged up in November. The LIBOR administrator said it is consulting on plans to extend the retirement date for 3-, 6- and 12-month London interbank offered rates on dollars until late June 2023, although regulators are still pushing for banks to move away from the benchmarks as soon as they can [3].

The CBSL offered USD 75 Mn SLDBs in November auction which went undersubscribed (Close to USD 25 Mn were filled). The CBSL in a statement said “Subsequent to the said auction, due to renewed interest/ investor appetite for SLDBs, further investment of USD 62million was raised by close of business today (16th November), at the Weighted Average Fixed Rates determined for respective maturities on offer at the above auction, with settlement of such investments on 18.11.2020”. During this auction the CBSL did not offer floating rate SLDBs which are linked to 6M LIBOR USD. ICRA Lanka has previously highlighted the weaknesses of the SLDB fallback language to handle permanent cessation of LIBOR.

Yields on ISBs started to moderate throughout the month as investors reevaluated their initial reaction to the second wave. Bonds with the nearest maturity (27-Jul-21) saw yields dip up by ~2000 bps while longest maturity (28-Mar-30) bonds saw yields decreasing by ~130 bps.

External Sector

Figure 5: Exchange rate and outstanding forward volume

Source: CBSL

Sri Lanka further extended the import restrictions. The measure drew concern from European Union, a key export market, and called to end it.

Foreign capital of over LKR 1.7 Bn (USD 9 Mn) from treasuries and nearly LKR 2.8 Bn (USD 15 Mn) from equities exited from the domestic markets in November. In addition, USD 580 Mn foreign currency obligations were paid down during the month. The CBSL net purchases from the intervention in the FX markets were just USD 2.4 Mn. The gross official reserves further declined to USD 5.5 Bn.

Rupee gradually weakened against greenback during the month. Forward volumes declined gradually but picked up in the last week ahead of holiday season, while spot market volumes were weak.

Figure 6: Gross official reserves (Mn USD)

Source: CBSL

Prices & Wages

Figure 7: CCPI and Nominal Wage Rate Index of the informal private sector (Y/Y)

Notes: WRI (100=2012), CCPI (100=2013)

Source: CBSL

Wage growth slipped with the onset of the second wave of infections. Inflation rose marginally to 4.1% on account of rise in both food and non-food inflation. Bus fares were increased on 11th November and contributed to increase in non-food inflation.

Equities

Domestic Market

Figure 8: ASPI (M/M)

Source: CSE

ASPI gained over 9%, while CSE’s liquid S&P gained over 7% in November. CSE rode on the better-than-expected 2Q corporate financials, ending of the lockdown, and vaccine optimism. In addition, investors also parsed the 2021 Budget Proposals which has emphasis on certain sectors. Trading continued to be dominated by domestic retail investors while foreigner investors were on the sell-side. Market PBV (Price-to-book value) increased to 1.05 from 0.96.

All GICS sectors recorded gains in November. Transport sector shares recording exceptional performance.

Figure 9: GICS sector performance- November

SectorIndex Points Gain
Transportation1505.32
Automobiles & Components189.01
Materials173.57
Consumer Durables & Apparel148.66
Capital Goods140.14
Retailing129.76
Commercial & Professional Services113.80
Utilities82.79
Telecommunication Services72.38
Household & Personal Products70.06
Food, Beverage & Tobacco56.70
Healthcare Equipment & Services39.60
Insurance37.48
Diversified Financials30.08
Real Estate25.99
Consumer Services24.50
Energy20.09
Banks18.95
Food & Staples Retailing8.83

Source: CSE

Global Markets

Early enthusiasm in US equities in the run up to the election diminished following election day as the control of the senate by the Republicans was a possibility which might stall the economic stimulus. But the vaccine announcements gave a nudge to the market. Nevertheless, US indexes gained double digits. European and Emerging markets were broadly higher. 

Commodities

Figure 10: Crude oil price

Source: Bloomberg quoted in CBSL

Oil prices rebounded as vaccine optimism overwhelmed concerns over lockdowns to contain the virus.

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

Source: Forbes & Walker

Tea prices sustained momentum amidst constrained supply. It was proposed to increase the daily wage of plantation workers during the budget speech which if implemented without addressing productivity will have implications for plantation sector viability.

Figure 12: Coconut price and quantity sold at weekly auctions

Source: CDA

CDA suspended coconut auctions from 30th September indefinitely as coconut prices soared due to supply shock.

Figure 13: Rubber price weekly auctions

Note: Price of Latex 4X

Source: RRISL

Rubber prices continued to hold firm in November. Demand for surgical gloves and tires drove the rubber prices.

Figure 14: Gold price

Source: CBSL

Gold plunged to July levels as investors turned bullish with the vaccine optimism.

Figure 15: Base metal price index (2016=100)

Notes: includes Aluminum, Cobalt, Coper, Iron Ore, Lead, Molybdenum, Nickel, Tin, Uranium, and Zinc

Source: IMF

Base metal prices soared with bets on faster global recovery on the back of vaccine announcements.

Real Sector

Figure 16: 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

The resurgence of the second wave and partial lockdowns forced businesses to cut activities. PMI data for October indicated a contraction after 5 months of recovery from the initial lockdown. The contraction was profound in the manufacturing of wearing apparel and food & beverages sectors. Services sector, which was still recovering, also faced a major setback with the second wave. Business activities declined especially in wholesale and retail trade, transportation, and accommodation, food and beverage subsectors. However, in November, the economic activity level seemed to have improved and performed better than what was anticipated earlier. This is in part due to many businesses adopting remote working arrangements and business continuity plans.

ICRA Lanka’s nowcasting models show GDP contracted by 17.5% (margin of error = +/- 16%) in 2Q to and by 6.1% (margin of error = +/- 6%) in 3Q. Based on our predictive models we expect the economy to contract by 7.9% (base case) to 17.8% (protracted case) in 4Q.

Read ICRA Lanka’s 3Q Economic Update to see a complete list of predictions.

Outlook for December

Economy is expected to operate with a slack. Weaker aggregate demand is likely to keep the inflation in check. Only about USD 8 Mn foreign currency obligations are pending for December, therefore we do not expect significant fluctuations in excess liquidity, hence the money markets may remain broadly 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.