Foreigners sell us$330mn sri lanka bonds in march _ economynext

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ECONOMYNEXT – Foreign investors in Sri Lanka rupee securities has sold 330 million dollars’ worth bonds in March, with 17.6 billion rupees (121 million dollars) being sold in the week to March 21, official data shows. Foreign investors have sold 577 million dollars of rupee bonds (83 billion rupees) so far this year. Foreign investors started to exit the market rapidly after a rate cut in April as domestic credit picked up and the budget


deficit deteriorated (Sri Lanka on a risky pro-cyclical path as credit expands: Bellwether). The central bank released liquidity and printed money to suppress the credit market, and the anti-market rate controls pushed domestic credit growth to unsustainable levels generating a balance of payments crisis, as forecasted by analysts even before budget deteriorated in January 2015. ( Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates: Bellwether). The central bank started to reduce its loose monetary policy around December after failed float of the currency in September 2015. “If rates are not raised beforehand to slow credit before the float, the exchange rate will fall further than if rates were raised,” EconomyNext’s policy columnist warned shortly before the attempted float ( Sri Lanka BOP episode update: Bellwether).

“Sri Lanka has little experience of this type of floating without a rate hike.” The float failed and the rupee continued to be defended. The rupee has fallen from 130 to around 145 to the US dollar so far. The fallen rupee however destroys real salaries and wages, bringing a ‘belt tightening’ correction to wage earners. Currency collapses also destroy real lifetime savings in banks. Rates were hiked by 50 basis points after commercial banks raised their deposit rates only in December. Analysts say if the central bank had not continued to pump in printed money (inject liquidity) rates would have gradually risen from the second first quarter of 2016.

The central bank earlier tightened the reserve ratio, an archaic tool abandoned by most countries and which simply makes the banking system inefficient, but continued to print money. There are fears that the central bank may impose credit ceilings, another blunt administrative control brought back from the dead past, during the time of the last regime, which can make imbalances in the credit system last longer and also promote capital mis-allocations. Though yields in long-term government bonds rose amid corruption allegations, short term Treasury bill yields were kept down with printed money. Foreign investors, believed to be mostly funds connected to Franklin Templeton group, now hold about 220 billion rupees securities (1.5 billion US dollars) down from 465 billion rupees before the rate cut. In February Fitch downgraded Sri Lanka’s speculativecredit to ‘B+’ from ‘BB-‘ after a November budget failed to impress.

Both Standard and Poor’s Fitch also downgraded the outlook on the rating to negative. But data shows that investors started the second bout of selling before that. Prime Minister Ranil Wickremesinghe had presented a cabinet paper that is expected to tighten fiscal policy with an International Monetary Fund backed policy framework expected to bring stability back to the system. Interest rates are also higher now. Overnight money market rates – unusually – are as high as 8.75 percent in some deals, 75 basis points above the 8.0 ceiling rate.

Higher interest rates makes banks raise more deposits and will also curtail credit allowing some of the shock of fleeing capital to be absorbed by reduced domestic consumption and credit. By sterilizing all interventions and keeping money markets flushed with liquidity the central bank forced the full shock of exiting capital to be borne by foreign reserves in 2015. Analysts had warned before the crisis that by suppressing interest rates and printing money (monetizing debt) to accommodate a runaway budget deficit, the central bank will make the eventual rate increases needed to correct imbalances in the credit system greater than it would have otherwise been (Colombo Mar26/2016). ECONOMYNEXT – Foreign investors in Sri Lanka rupee securities has sold 330 million dollars’ worth bonds in March, with 17.6 billion rupees (121 million dollars) being sold in the week to March 21, official data shows. Foreign investors have sold 577 million dollars of rupee bonds (83 billion rupees) so far this year. Foreign investors started to exit the market rapidly after a rate cut in April as domestic credit picked up and the budget deficit deteriorated (Sri Lanka on a risky pro-cyclical path as credit expands: Bellwether). The central bank released liquidity and printed money to suppress the credit market, and the anti-market rate controls pushed domestic credit growth to unsustainable levels generating a balance of payments crisis, as forecasted by analysts even before budget deteriorated in January 2015.

( Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates: Bellwether). The central bank started to reduce its loose monetary policy around December after failed float of the currency in September 2015. “If rates are not raised beforehand to slow credit before the float, the exchange rate will fall further than if rates were raised,” EconomyNext’s policy columnist warned shortly before the attempted float ( Sri Lanka BOP episode update: Bellwether). “Sri Lanka has little experience of this type of floating without a rate hike.” The float failed and the rupee continued to be defended.

The rupee has fallen from 130 to around 145 to the US dollar so far. The fallen rupee however destroys real salaries and wages, bringing a ‘belt tightening’ correction to wage earners. Currency collapses also destroy real lifetime savings in banks. Rates were hiked by 50 basis points after commercial banks raised their deposit rates only in December. Analysts say if the central bank had not continued to pump in printed money (inject liquidity) rates would have gradually risen from the second first quarter of 2016. The central bank earlier tightened the reserve ratio, an archaic tool abandoned by most countries and which simply makes the banking system inefficient, but continued to print money. There are fears that the central bank may impose credit ceilings, another blunt administrative control brought back from the dead past, during the time of the last regime, which can make imbalances in the credit system last longer and also promote capital mis-allocations.

Though yields in long-term government bonds rose amid corruption allegations, short term Treasury bill yields were kept down with printed money. Foreign investors, believed to be mostly funds connected to Franklin Templeton group, now hold about 220 billion rupees securities (1.5 billion US dollars) down from 465 billion rupees before the rate cut. In February Fitch downgraded Sri Lanka’s speculativecredit to ‘B+’ from ‘BB-‘ after a November budget failed to impress. Both Standard and Poor’s Fitch also downgraded the outlook on the rating to negative. But data shows that investors started the second bout of selling before that. Prime Minister Ranil Wickremesinghe had presented a cabinet paper that is expected to tighten fiscal policy with an International Monetary Fund backed policy framework expected to bring stability back to the system. Interest rates are also higher now. Overnight money market rates – unusually – are as high as 8.75 percent in some deals, 75 basis points above the 8.0 ceiling rate.

Higher interest rates makes banks raise more deposits and will also curtail credit allowing some of the shock of fleeing capital to be absorbed by reduced domestic consumption and credit. By sterilizing all interventions and keeping money markets flushed with liquidity the central bank forced the full shock of exiting capital to be borne by foreign reserves in 2015. Analysts had warned before the crisis that by suppressing interest rates and printing money (monetizing debt) to accommodate a runaway budget deficit, the central bank will make the eventual rate increases needed to correct imbalances in the credit system greater than it would have otherwise been (Colombo Mar26/2016).


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