Rates To Fall In Six Months
- Bourse Geared To Takeoff Then
Inflation is expected to hit the double digit range due to the impact of various price increases before tapering off in another six months time, a financial analyst attached to a stockbroking firm told this newspaper.
That would help the bourse to grow, he said. The prevailing high interest rate market is now a more attractive proposition for investment rather than the Colombo stock market. The recent rupee depreciation and the attendant price appreciations therewith; increases in petrol, electricity, bread, milk powder, cement and gas prices, all have caused upward pressure on prices either directly or indirectly, a knock on effect being high inflation and high interest rates as a result, to offset the liquidity crisis besetting the economy. According to the Government controlled Statistics Department, inflation as measured by the Colombo Consumers’ Price Index, on an annual average basis marginally decreased to 5.6% last month as opposed to 5.7% in April. However the point to point change in inflation during the commensurate period increased from 6.1% to 7%. “December, that is six months hence is in any case a high inflationary month due to seasonal demand, but, in the ’long run’ inflation is expected to taper off and therewith interest rates,” he said.
On Central Bank of Sri Lanka’s (CBSL’s) huge stock of Treasury (T) Bills, some over Rs. 200 billion as opposed to a fraction of it a year ago and the inflationary pressure caused as a result of new, paper money entering the economy? The source said that the bridling of credit growth to the private sector, by placing a cap of 18%, would mitigate such ill effects. However such credit could be increased by another 5% if the source of funding for the balance is foreign. Last year, private sector credit grew by 34.5% year on year (YoY). According to available statistics, private sector credit in the first quarter of the year grew by 35.2% YoY to Rs. 2,161.1 billion. One per cent of that figure would amount to Rs. 21.6 billion and 5%, Rs 108.1 billion or nearly half of CBSL’s current T Bill stock. Recently CBSL Deputy Governor B.D.W.A. Silva speaking to this reporter said that if CBSL could cut its present T Bill stock by half (ie a little more than the Rs. 108 billion figure), that would ease inflationary pressure on the economy. That cut, coupled with a 5% curb in credit growth, may help to nullify inflationary pressure on the economy, creating a situation similar to that which existed a year ago, where CBSL’s T Bill stock was down to Rs. one billion or so.
Recently CBSL has taken slow but gradual steps to ease its huge stock of T Bills by retiring the same at maturity. However that may be, with inflation expected to be tamed by the year end due to the various policy measures taken by the Government, interest rates are then expected to come down, the source said (see also the business editorial found on page 41). Currently pressure on rates is due to the paucity of liquidity in the market, he said. A crisis in the island’s balance of payments (BoP) situation has had led to this, the source added. The BoP crisis is essentially driven by a widening trade deficit where imports are greater than exports.
Meanwhile the Colombo bourse on a low Rs. 286.6 million turnover at Monday’s trading continued with its freefall (albeit a break on June 1), with the benchmark ASI falling by 136.58 points (2.8%) over that of its close on June 1 to finish Monday at 4,748.60 points while the more sensitive MPI fell by 135.68 points (3.12%) to finish at 4,207.80 points.
The source said that the rise in interest rates compounded by the global crisis was having its impact on the market, hence the reason for its fall. On this low turnover level, the bourse also witnessed a Rs. 43 million net foreign outflow (NFO), which he described as being a natural reaction to what is happening globally. The global economic crisis which has its genesis in the prevailing euro zone crisis has resulted in European investors in particular pulling out the investments they have had made elsewhere, such as in Sri Lanka, and taking their money back home. These also help market indices to fall.
Previously, both the government securities market and the Colombo bourse have had got away lightly from the euro zone crisis, with the latter especially, even enjoying a net foreign inflow thus far for the year.
Meanwhile John Keells Stockbrokers commenting on Monday’s fall said, “Broad based selling pressure resulted in a sharp drag on the indices, causing the ASPI to reach its lowest level since mid July 2010 amid subdued turnover levels which were dominated by JKH.” (See also this publication’s last week’s business pages)
However that may be, the following day Wednesday saw the bourse enjoying a Rs. 48.84 million net foreign inflow on a low Rs. 246.4 million turnover, with the indices continuing to decline, the ASI by 10.85 points and the MPI by 9.54 points to close at 4,737.75 and 4,198.26 respectively. On Thursday the bourse made pyrrhic gains on a low Rs. 499.5 million turnover, with the ASI gaining by 20.23 points to close at 4,757.98 points and the MPI by 25.09 points to close at 4,223.35 points on a Rs.20.62 million NFO, while on Friday, on a low Rs.309.3 million turnover, these indices gained by 40.72 and 23.41 points respeectively.