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Illusion To Think Sovereign Debt Won’t Be Impacted

  • QE Tapering

Paul Smith

As institutions in Asia are not big enough to counteract, the impact of quantitative easing (QE) tapering by the Federal Reserve System (Fed.) will be felt by emerging markets, a financial analyst told a meeting in Colombo on Thursday (November 21).

Paul Smith, Managing Director Asia Pacific, CFA Institute, gave this reply when this reporter asked him whether there would be a tapering off of QE, if so when, and whether such a move would have an impact on markets such as Sri Lanka?

Smith said that Asian markets have had previously felt the impact of funds outflows.

He however said that the Fed.’s incoming Chairman Ms. Janet Yellen had said that tapering off would begin only after the US economy begins to grow.

However it will take place, Smith said.

But  he said that he had been speaking to “serious” investors in the equities market, they had told him that their equity investments in emerging markets will not be impaired when the Fed. begins to taper  off its Bond buying programme.

When this reporter asked him what impact the Fed.’s tapering would have on investments in Sovereign debt, his reply was that we wrongly feel that we would be insulated from such events.

But the US and European investors, when they  have liquidity problems, will sell off such investments and Sovereign debt is a liquid instrument, he said.

In Sri Lanka, foreigners are allowed to invest up to 12.5% in Treasury (T) Bills and T Bond outstanding.

According to Central Bank of Sri Lanka (CBSL), this figure as at November 13 was Rs. 478,790 million.

At the middle of the year when the Fed. then gave indications that QE tapering would kick off soon , the local exchange rate (ER)  weakened to the Rs. 135.20 level in spot, interbank trading of the US dollar as at August 28, while the yield of the 1.4.18. Treasury, the most popular exit mode of foreigner’s from the local Sovereign debt market, weakened to the 11/85/90% level in two way quotes because of their exit.

Consequently, due to “weak” economic data emanating from the USA, the Fed. put on hold  its proposed tapering off of  its QE programme.

The ER since (ie as at Thursday) is being administered at the Rs. 131.10 price level by CBSL, while the 1.4.18. maturity had had strengthened to the 11/15% level in secondary market trading as at Thursday, since its low of 11/85/90% or thereabouts as at August 28. Treasuries and ER markets held on to those levels on Friday.

The event was organized by the CFA Institute (see also page 37).

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