Rupee ends firmer on bank dollar sales

REUTERS: The Sri Lankan rupee ended slightly firmer yesterday as exporter dollar sales outweighed importer demand for the greenback on hopes that political stability would resume after coalition partners agreed to continue with a cabinet reshuffle. The rupee ended at 155.10/20 per dollar, compared with Tuesday’s close of 155.45/55. The rupee hit a record low of 155.90 last week.

“There was some selling by foreign banks which helped the rupee to end firmer,” a dealer said.
Prime Minister Ranil Wickremesinghe and Secretary of President Maithripala Sirisena-led party yesterday told the parliament that the unity government of their parties will continue, easing political uncertainty that hurt sentiment last week.

Wickremesinghe’s centre-right United National Party (UNP) and Sirisena’s centre-left Sri Lanka Freedom Party (SLFP) were routed by a party backed by former President Mahinda Rajapaksa in local polls on February 10, putting the government into a crisis.

The local currency has weakened 1.3 percent so far this year. The domestic currency lost 2.5 percent last year and 3.9 percent in 2016.

The currency is expected to be pressured by continued importer demand for dollars, dealers said.
Dealers added they expect a gradual depreciation in the rupee and higher volatility this year on account of debt repayments by the government.

Sirisena’s administration must repay an estimated Rs.1.97 trillion in 2018 – a record high – including US $ 2.9 billion of foreign loans and a total of US $ 5.36 billion in interest.

Foreign investors sold government securities net worth Rs.2.1 billion in the week ended February 14, the Central Bank data showed.

(Reuters)

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Credit moderates; possibility of rate cut hangs in balance

Sri Lanka’s private sector credit growth has continued its moderation path towards end-2017, reflecting the effects of the delayed monetary policy transition gradually taking hold of the country’s money in circulation.

Sri Lanka’s Central Bank held its key policy rates on February 15 – its first monetary policy review for 2018 – citing more benign inflation and credit demand. But the Central Bank stays wary of its next rate move.

According to the latest data published by the monetary authority, the banks have extended a total of Rs.60.0 billion in private credit to the individuals and corporates in December 2017, registering a growth of 14.7 percent over the same month in 2016.

This is a gradual moderation of such credit by the banks from almost 22 percent in December 2016 to 18.6 percent six months later and further to 17.5 percent in September 2017.

All in all, the banks operating in Sri Lanka have extended a total of Rs.618 billion in credit to the private individuals and corporates during 2017, a substantial slowdown from a little over Rs.750 billion credit extended in 2017.

“The policies adopted by the Central Bank and government have helped stabilize the economy. By end-2017, both the growth of broad money supply and the growth of credit extended to the private sector by commercial banks moderated to desired levels,” the Monetary Board said in its policy statement, last week.

Sri Lanka saw a spurt in the private sector credit during 2015 continuing to 2016, stoked by the lower interest rates maintained artificially to appease the electorate soon after the coalition government came into power.

But the party could not last long as the foreigners fled the low-yield government bonds for risk-free developed market treasuries and much of the easy credit flew out of the country on imports busting the rupee from Rs.132 to Rs.150 for the dollar and plunging the country into a balance of payment crisis once again.

Although the macroeconomic fundamentals have improved since then, the shock result from the local government election on February 10, which shook the foundation of the coalition government, has sent the markets into a panic mode.

The panic buying of dollars by the importers has weakened the rupee in the aftermath of the election results, while the analysts fear that the uncertainty could spill over into interest rates.

They are of the view that the shock election result a fortnight ago hijacked an otherwise space available for the Central Bank to announce a rate cut to stimulate economic growth.

The Monetary Board also noted that the economy is currently operating at a level below its potential. Nevertheless, as per the available indicators, the economy is likely to recover from the effects of adverse weather conditions in the past two years and benefit from the expected boost in the external demand and foreign direct investment inflows.

The improvements in the trade front, including the execution of new trade agreements supported by increased private investment driven by structural reforms, are also likely to provide the necessary impetus for the economy to achieve its potential in the medium term.

According to some analysts, the February monetary policy statement, which sounded a more positive tone, has opened up the possibility of a rate cut at the next policy meeting in April, to stimulate a wobbling economy.

Apart from the uncertainty in the domestic political climate, the Central Bank also watches the normalization in the monetary policies in major economies with the United States’ Federal Reserve is expected to increase the pace of its rate hikes in 2018, starting from next month, as the US economy is finally attaining its inflation target of 2.0 percent, amid tighter labour market.