The Sunday Leader

Borrowing rates to rise

  • Liquidity falls by 2/3rds

Market sources predicted a gradual rise in primary rates upto the first quarter of this year as a correction, and in tandem with Central Bank of Sri Lanka’s (C.B.S.L.’s) overnight (o/n) repo rates, which rates are higher, before a rate re-visit is made.

C.B.S.L.’s o/n rate is currently more than the shorter Treasury (T) Bill primary rate.
While C.B.S.L.’s o/n repo rate is around the

8% + level, in tandem with inter-bank borrowing rates, T Bills of 91, 182 and 364 day maturities at last week’s primary auction fetched yields of 7.86%, 8.86% and 9.4% respectively.

Government borrowing rates from the domestic market which hit a nadir in the week ended November 27 has been gradually rising, coinciding with the announcement of the presidential elections during that period.

T Bills of 91 day maturity which bottomed-out at 7.25% then, has since risen by 61 basis points (b.p.s) to 7.86%, 182 day bills have increased by 53 b.p.s to 8.86% and those of 364 day maturities by 23 b.p.s to 9.4%.

“The 91 day maturity may end the quarter at the 8½% levels, the 182 day at the 9¼% levels and the 364 day maturity at the 9.75%-10% levels before seeking a direction,” the sources said.

The impact of these developments in the real economy is that it has not helped credit to grow, with credit continuing to be tight, thereby stifling investments and job growth.
Sources further said that overnight liquidity which was in the Rs. 45 billion range has since fallen by 2/3rds to be in the Rs. 15 billion range, with the drying up of foreign inflows.

Reasons for the rise in T. Bill rates are two fold, the sources said.

Those are increased Government borrowings to meet its growing electioneering expenditure needs and investors in government securities, i.e. T Bills and T Bonds adopting a “wait and see” attitude, before planning their next move, i.e. after Tuesday’s Presidential elections.

Market perception is that if the U.N.P. backed Presidential candidate General Sarath Fonseka wins Tuesday’s elections, it will spur foreign inflows, they said. But in such a scenario, those increased inflows will have to be looked at in the context of the new Government’s position on expenditure, the sources said.

If heavy Government expenditure is to continue, that will once again place upward pressure on rates, the sources said.

T Bills, the main instrument that the Government uses to borrow short term from the market, have seen its yields going down rapidly with the war end, with sources saying that the decline was too rapid, hence needing a correction.

At the height of the war, i.e. at the beginning of last year, the 91 day T Bill fetched a yield of 17.3%, 182 day (18.57%) and 364 day (19.12%), before going down fast with the war end. Meanwhile Government issues T Bonds to the domestic market to meet its longer tenure (i.e. for over a year) borrowing needs.

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