Sri Lankan Stock Market Volatile
by Hasitha Ayeshmantha
In the limelight of Sri Lanka getting downgraded by Fitch, many parties have speculated that the Sri Lankan economy will have to face strong opposing 0headwinds in the near future.
Since the Fitch ratings downgraded Sri Lanka, the Colombo stock market has been under severe criticism by several parties. This week’s economy focuses on the probable outcome in the near future.
According to Fitch Ratings a negative outlook has been assigned to the IDRs.The issue ratings on Sri Lanka’s senior unsecured foreign and local currency bonds are also downgraded to ‘B+’ from ‘BB-‘.The report adds that the Country Ceiling is downgraded to ‘B+’ from ‘BB-‘and the Short-Term Foreign-Currency IDR is affirmed at ‘B’.
Fitch states the rating action reflects increasing refinancing risks. A statement from Fitch stated that Sri Lankas external liquidity ratio, as measured by Fitch at the end of 2015, was 70.9%, which is far below the median of B-rated peers of 171.9% and the BB median of 152.4%.
Another reason for the rating action was significant debt maturities. However, Fitch Ratings noted that the prevailing low oil prices will continue to support Sri Lanka’s current-account deficit in the near term. Fitch expects the current-account deficit to remain manageable at about 3% of GDP over 2016-17.In terms of weaker public finances, the deterioration in Sri Lanka’s fiscal finances is driven partly by consistently low general government revenues.
According to the above scenario, the issue ratings on Sri Lanka’s senior unsecured foreign- and local-currency bonds are also downgraded to ‘B+’ from ‘BB-’. The Country Ceiling is downgraded to ‘B+’ from ‘BB-’ and the Short-Term Foreign-Currency IDR is affirmed at ‘B’.
The rating action reflects the following key rating drivers: Increasing refinancing risks. The Sri Lankan sovereign faces increased refinancing risks on account of high upcoming external debt maturities. Furthermore, the sovereign’s external liquidity position remains strained, reflecting pressure on foreign exchange reserves. In Fitch’s view, this partly reflects a weakening in policy coherence that increases the likelihood of Sri Lanka requiring external liquidity support from the IMF and other multilateral institutions.
Fitch estimates the sovereign’s external debt service to be close to USD 4billion for the rest of 2016, compared with FX reserves of USD6.3bn (end-January 2016). Sri Lanka’s vulnerability to a shift in investor sentiment was evident when investors sold-off the equivalent of nearly USD2bn in local-currency government securities in 2015. A further outflow from treasury bills and treasury bonds, which account for about 31% of the country’s FX reserves, could put more pressure on reserves.
Speaking to The Sunday Leader renowned economist Dr. Sirimal Abeyratne said that the present status of the Sri Lankan stock market is at a highly volatile stage. Quoting the Fitch ratings fiasco as an example, the economist stressed that the events unfolding amidst IMF, will definitely highlight the negative aspects of the country.
Elaborating on his statement, Dr. Abeyratne said that the situation will affect the general economic outlook of the country and in the process will hit back at investor confidence, which according to Dr. Abeyratne, is not at a good point right now.
Dr. Abeyratnesaid that there are two types of significant entities in the stock market- speculators and investors. According to the economist, speculators are a community which makes a short term profit out of making speculations on the economy while the investors pump in money to the stock market.
According to Dr. Abeyratne, the investor part is currently the weaker out of the two entities and however, they are the ones that keep the flow of currency within the stock market as well. Now, with the ratings aspect coming into play, the investors will act on withdrawing their interests and the companies will also reduce the number of shares that they disperse to the Colombo stock market. This, again according to Dr. Abeyratne, will put forward a negative image on the country’s economy.
Speaking about the impact on interest rates, he said that the investors in the bond market will have a very hard time in the days to come as they will be directly affected by the gravity of the situation. With the interest rates going up, the demand for bonds will increase. Dr. Abeyratne believes that this will set the tone for a different outcome which will drive investors out of the stock market and ultimately diminish investor confidence.
Stressing on the relationship between bond prices and interest rates, he added that since the premium will go up as a result of the Fitch ratings collapse, the interest rates will be increased by a significant amount. Alongside that, and as a result of the increased interests, the bond prices will go down by a good margin.
Providing insight to the upcoming IMF engagements, Dr. Abeyratne said that ‘it is like taking Panadol for a fever.’ According to the economist, the IMF loan will provide a short term solution for a long term problem. Elaborating on his remark he said that the country has been following the same path since the 2009 crisis and that this government too has decided ‘apply a plaster’ over the bleeding wound.
According to Dr. Abeyratne, the IMF loan will keep the country afloat for a period of three-four months, at which point, the country will have to start paying off that as well. Proposing a solution for the matter, he said that the country should have approached the issue with caution and only after implementing proper policy reforms.
The next proposed agenda was to restore investor confidence by imposing the policy reforms in the local business environment.
Sri Lanka being a small country, any powerful individual or the government itself is able to manipulate the stock market. Since the Sri Lankan stock market is the smallest in the region, even smaller than Singapore, fluctuations in this magnitude will create immediate repercussions in the economy. Such repercussions will have a huge impact on the stock market.
All revealed on 31st
Meanwhile, speaking to The Sunday Leader, Chairman of the Securities Exchange Commission Thilak Karunaratne said that the entire world is going through a similar. The excerpts of the conversation are as follows:
What sort of impact does the Fitch ratings downfall have on the Colombo stock market?
“Evidently, the Fitch ratings downgrading will create a negative image on the country’s economy. However, if we look at the entire world, which includes top level entities such as China and Europe, they are also going through a similar phase in their economy. So I find it unjust to look at Sri Lanka in a similar scope.
True that the Fitch ratings fiasco created tremors on the surface, but a majority of the world is undergoing economic crisis. Therefore Sri Lanka being one of the most miniature entities of the spectrum is natural to undergo similar repercussions.
How does the global situation influence the local scenario?
The entire world has become a global village. The burdens of the neighboring entities will evidently have a direct impact on the other members of the region as well. In our case, China being the largest entity on the region, is undergoing a very difficult time. Therefore this will affect the trade and other relations between the region more directly.
Not only that, but the entire world is going through a somewhat of a economic crisis. Therefore it is natural for that to influence emerging economies such as Sri Lanka. This could be recognised as a worldwide phenomenon.
So there are no local factors affecting this?
Of course, there are several local factors which are responsible for the present situation. But, I am not ready to go public with them as yet. I will reveal all this on the 31st.
What has been done on your part to tackle this?
I can guarantee you that we at SEC are dedicating ourselves to raise the Capital Market. However, I have a solution for this which will be revealed on the 31st. These solutions will certainly aid the country’s economy and will be a catalyst to boost the revenue.
The week so far
Bourse able to close the short week with a positive start and an end despite the low turnover recorded for the week. Foreign investors were on selling sentiment except on Thursday while recording a net foreign outflow of LKR 410 Mn. Highest turnover was recorded on Wednesday while lowest turnover was recorded on Monday.
Diversified, Trading and Beverage Food & Tobacco sectors contributed to the market turnover during the week while Investment Trust sector became the highest gainer (+3.25%). CARS, JKH and HNB lifted up the ASPI by 14.34 points while SLTL, KHL and HHL dragged down the index by around 10.02 points. During the week ASPI and S&P SL 20 was up by 35 points and 30 points respectively.
The Rupee depreciated slightly during the week and closed at LKR 147.05 per USD. One year T-bill rate increased to close at 9.90%. Gold prices decreased to close at 1219.22$/Oz while oil price decreased to close at 38.91$/Barrel.
This week’s business world activity was listed out as below.
Sri Lankan exporters have asked the government to take up an import tariff charged by China on seafood when negotiating a free trade agreement as they seek to diversify markets, an official said. Seafood Exporters Association of Sri Lanka Chairman Prabhash Subasinghe said they were seeking government support to ramp up production and access new markets with a ban by the European Union hurting the sector. Subasinghe, who is also Managing Director of Global Sea Foods, said seafood exports are suffering because of the ban and an “unfriendly” import and export policy environment. “The 9% tariff charged by China on our seafood exports is a problem and this needs to be discussed at the FTA formulation,” he was quoted as saying in a statement.
The Government has allocated Rs. 37.5 billion to provide the fertiliser subsidy to the farmers, and distributing the subsidy will begin from the end of this month, the Ministry of Agriculture says. According to the Ministry of Agriculture, paddy farmers will receive an annual subsidy of Rs. 25,000 for every two hectares. The government has also decided to grant Rs. 10,000 per hectare annually for the farmers who grow vegetables and additional crops as the fertiliser subsidy. The subsidies will be given to farmers cultivating vegetables, green gram, cow pea, soya bean, Bombay onion and several other crops.
Sri Lanka’s consumer prices nation-wide rose 1.7 percent in February 2016 from a year ago, according to a new national price index, compared with a 0.7 percent fall in January, the statistics department said. On a month-on-month basis, the National Consumer Price Index (NCPI), compiled using prices collected from all nine provinces with a base year of 2013, in February fell 1.1 percent, similar to the month before. “This increase of inflation in February 2016 was mainly due to the elimination of the effect of price reductions of few essential food items, L.P. Gas, kerosene oil, petrol, diesel and bus fare in the interim budget proposal implemented by the government in February 2015,” Amara Satharasinghe, Director General of Census and Statistics said.
Foreign investors have sold 200 million US dollars’ worth rupee denominated Treasury bills over the past two weeks, accelerating sales which slowed for a few weeks, official data shows. Foreign investor holdings of Sri Lanka rupee bonds which were at 267.8 billion rupees on March 02, down from 268.8 billion rupees a week earlier, fell to 247 billion rupees on March 09 and to 237 billion rupees on March 16.Since the beginning of the year foreign investors have sold about 450 million dollars of bonds. Foreign investors bought some bonds early in 2015 but started to exist after a damaging rate cut in April 2015, just as domestic private credit was taking and the budget went haywire in January 2015.