Key interest rates down 25bps, credit ceiling off soon

Dec 12, 2012 (LBO) - Sri Lanka has cut its main policy rate at which money injected to banks by 25 basis points to 9.50 percent to boost loans and the Central Bank said a credit ceiling would expire by the end of this month.

Authorities imposed a credit ceiling of 18 percent for banks for 2012 after Sri Lanka's monetary system ran into a balance of payments crisis largely due to excessive bank credit taken by state entities to manipulate energy prices.

"The growth of credit obtained by the private sector from commercial banks continued to decelerate, reaching 23.5 per cent (y-o-y), by October, from a high of over 35 per cent prior to March 2012," the Central Bank said.

"This growth is expected to decelerate further to around 19 per cent by end 2012."

Bank credit shot up from the second half of 2011 as the Central Bank injected tens of billions of rupees into banking system to sterilize foreign exchange sales driving imports to unsustainable levels.

But after interest rates and energy prices were raised and the exchange rate was allowed to fall in response to rupee injections from February 2012 credit started to fall off.

Official data shows that total bank credit to the private sector including dollar denominated loans fell from 155 billion rupees in the March 2012 quarter to 73 billion rupees in the June quarter and 69 billion rupees in the September quarter.

"The Central Bank has been carefully monitoring the developments in the various sectors of the economy vis-à-vis the projections for each of these sectors," the monetary authority said in its December policy statement.

"As per current information, a reasonable leeway has emerged between actual credit growth and the ceiling imposed by the Central Bank, indicating a further slowdown in credit utilisation.

"Economic activity has also experienced some moderation with adverse weather conditions and the uncertainty in the global economy exerting some pressure on growth in 2012."

Credit to the credit however still remained strong as taxes from imports fell amid excessive spending. Data showed state entities such as the road development agencies has become a big bank borrower outside the main budget deficit over the past year.

The rate cut came as inflation spiked to the highest level since 2009.

The Central Bank said inflation rose to 9.5 percent in November 2012 from 8.9 percent in October.

"However, as per current projections, inflation is expected to moderate towards the second quarter of 2013 and stabilise thereafter benefiting from the strong demand management policies introduced at the beginning of this year," the Central Bank said.

Sri Lanka has been prone to high inflation and balance of payments trouble ever since a so-called 'soft-pegged' exchange rate regime was created in 1951 abolishing a hard peg that had kept the exchange rate fixed and inflation low.

Sri Lanka has a failed Bretton Woods style peg designed by interventionist economics from Office of Monetary Research of the US Treasury.

Critics have pointed out that such pegs could generate very high levels of inflation regardless of the interest rate as foreign exchange operations, which created money outside the policy rate system, could either enhance or undermine the state policy stance.

Update II
http://lbo.lk/fullstory.php?nid=1456344564

Sri Lanka’s crafty rate cut
December 12, 2012 7:12 am by James Crabtree
Having been forced into a dramatic interest rate hike earlier this year to fend off a balance of payments crisis, Sri Lanka’s central bank has made more small waves in the south Asian tourist island this morning, with a rate cut.
The move caught out local analysts, as there had been no hint of a change in policy in recent weeks.
A hastily-produced note from Colombo-based brokerage CT Smith explained:
In an unexpected move, the Central Bank of Sri Lanka (CBSL) reduced its repo and reverse repo rates by 25bps each to 7.5% and 9.5% respectively today, after adopting a tight monetary policy since April 2011…. the rate cut came in as a surprise with country’s headline inflation remaining sticky at high single digits.
On a trip to Sri Lanka in October, the FT was granted an audience with central bank governor Ajith Cabraal, who stressed his plans were to hold things steady until well into next year. So what has changed?
The first thought might be that Sri Lanka’s economy needed a boost as it is one of several Asian emerging economies that have recently come off the boil, including India, its much larger neighbour to the north.
But while the island’s growth has indeed slowed over the last year, after two boom years following the conclusion of the nation’s two-decade long civil war in 2009, most analysts project that the economy will tick along nicely at above 6 per cent next year.
Instead it seems the central bank governor may be indulging in a spot of statistical chicanery, taking advantage of the after-effects of the policy changes he introduced earlier this year, which were designed to stop the domestic economy overheating.
“Earlier in 2012 inflation jumped much higher, as the government raised fuel prices and allowed its currency to depreciate, which fed through into prices,” explains Prakriti Sofat, an economist at Barclays, who follows Sri Lanka.
“In the first half of 2013, given the high base inflation numbers will look much better, which the central bank believes is giving them some room to ease, although it does feel a bit premature.”
Either way, the move is likely to be a boost for the government of President Mahinda Rajapaksa, who remains popular domestically, despite rising concerns abroad about his increasingly authoritarian style, and scant progress on reconciliation with the defeated Tamil population in the island’s north.
Worries about Rajapaksa’s rule have of late focussed on his attempts to impeach the island’s chief justice, part of what many observers characterise as an ongoing attempt to weaken the island’s democratic institutions, and cement the control of the Rajapaksa family.
But so long as the island’s economy is purring along, the grip on power wielded by Rajapaksa, alongside his two powerful brothers, is only likely to tighten.

http://blogs.ft.com/beyond-brics/2012/12/12/sri-lankas-crafty-rate-rise/#axzz2EtZL2I6I

This is Good news for the share market players. The CB is guilty of creating the current down turn and now they want to reverse it.

Key interest rates down 25bps, credit ceiling off soon
December 12, 2012, 8:48 pm
The Island

The Central Bank yesterday (12) cut policy interest rates by 25 basis points (bps) in order to boost economic growth and said the credit ceiling imposed on commercial banks would be lifted at the end of this month.

"Having assessed the (economic) developments and outlook and taking into consideration the expected moderation in inflation towards the second quarter of 2013 and the need to support the economy to realise its growth potential in 2013 and beyond, the Monetary Board at its meeting held on 11 December 2012 was of the view that the current developments provide some space to ease monetary policy while maintaining overall macroeconomic stability," the Central Bank said in its ‘Monetary Policy Review – December 2012’ report released yesterday.

"Therefore, in order to induce a downward adjustment in market interest rates, the Monetary Board decided to reduce the policy rates of the Central Bank by 25 basis points each while allowing the ceiling on rupee credit extended by banks to expire at end 2012. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank will be 7.50 per cent and 9.50 per cent, respectively, with immediate effect. At the same time, the Monetary Board was also of the view that the credit ceiling imposed for 2012 has served its purpose and such a policy measure may not be required in the near future," it said.

The Repurchase rate (applicable to overnight deposits of commercial banks with the Central Bank) had earlier stood at 7.75 percent while the Reverse Repurchase rate (for overnight commercial bank borrowings from the Central Bank) stood at 9.75 percent. A year ago, the Repurchase rate stood at 7 percent while the Reverse Repurchase rate stood at 8.50 percent.

The rate cut comes as a pleasant surprise after economists predicted the Central Bank would have limited space to ease monetary policy given the government’s heavy domestic borrowings programme next year.

A slew of policy reversals adopted belatedly last February to a balance of payments problem that became manifest during the latter half 2011 have borne the desired results.

"Strong policy measures were adopted by the Central Bank and the government in the early part of the year to curtail excessive credit growth and contain the high import demand thereby arresting the imbalances that were emerging in the economy since the latter part of 2011," the Central Bank said yesterday.

"These measures were designed to curtail monetary expansion and possible future demand pressures while the reduction in the trade deficit was expected to dampen pressure on the external sector. At the same time, a one-off increase in headline inflation was anticipated on account of the upward revisions to several administratively determined prices, which were also a part of the overall stabilisation package. A modest slowing down of economic activity was also anticipated as a result of these demand management policies, which was reflected by the projections for economic growth during the year being revised downward to 6.8 percent.

"In the months following the imposition of these measures, a moderation in the money supply has been witnessed, largely on account of the deceleration in credit extended by commercial banks to the private sector. Broad money growth, year-on-year(y-o-y), declined to 18.2 per cent by October 2012 from a peak of 22.9 per cent in April. The growth of credit obtained by the private sector from commercial banks continued to decelerate, reaching 23.5 per cent (y-o-y), by October, from a high of over 35 per cent prior to March 2012. This growth is expected to decelerate further to around 19 per cent by end 2012. At the same time, in value terms, the drop in expenditure on imports has been greater than the decline in earnings from exports, narrowing the deficit in the trade account. Accordingly, the trade deficit contracted for the second consecutive month, declining by 1.0 per cent in October 2012, and this trend is expected to continue under the current flexible exchange rate regime.

"The Central Bank has been carefully monitoring the developments in the various sectors of the economy vis-à-vis the projections for each of these sectors. As per current information, a reasonable leeway has emerged between actual credit growth and the ceiling imposed by the Central Bank, indicating a further slowdown in credit utilisation. Economic activity has also experienced some moderation with adverse weather conditions and the uncertainty in the global economy exerting some pressure on growth in 2012.

"In the meantime, inflation, as measured by the y-o-y change in the Colombo Consumers’ Price Index (CCPI), increased to 9.5 per cent in November 2012 from 8.9 per cent in the previous month. Inflation has remained near 9 per cent in the second half of the year as a result of the increases to administered prices and recent tariff adjustments while adverse weather conditions towards the third quarter caused prices, particularly of fresh food items, to remain high.

"Going forward, although the Monetary Board is satisfied that domestic aggregate demand has been contained to moderate levels, it is likely that y-o-y headline inflation could remain somewhat elevated in the immediate months due to supply side factors. However, as per current projections, inflation is expected to moderate towards the second quarter of 2013 and stabilise thereafter benefiting from the strong demand management policies introduced at the beginning of this year," the Central Bank said.

Policy rate cut surprising move
* Growth gets priority over inflation – Analysts
December 12, 2012, 8:52 pm
The Island

The Ministry of Technology and Research conducted the "Reconciliation through Technology & Research" initiative on December 10 and 11, 2012 at the Open University of Sri Lanka- Jaffna Regional Centre. The institutions under the preview of the Ministry were able to establish new tie ups with the industry representatives of the area while promoting closer collaboration between them.

Several Technology transfer workshops were held during the two days covering effective building, food safety measures and Palmyrah extraction. The Secretary to the Ministry of Technology and Research Dhara Wijetilleka who declared open the Technology exhibition is seen speaking to a young inventor from Jaffna who had his invention exhibited during the exhibition. A cutting knife, which can be used at night during power failures. The knife and the chopping board are illuminated with battery operated LED bulbs ready to be switched on during a power failure.

The Central Bank’s 25bps monetary policy easing was seen as a surprising move, especially with the government’s heavy domestic borrowings requirements next year, analysts said.


"In an unexpected move, the Central Bank of Sri Lanka (CBSL) reduced its repo and reverse repo rates by 25bps each to 7.5% and 9.5% respectively today, after adopting a tight monetary policy since April 2011. Further, the CBSL stated in its policy review that "the credit ceiling imposed (on Licensed Commercial Banks) for 2012 has served its purpose and such a policy measure may not be required in the near future," CT Smith Stockbrokers said in a special report yesterday (12).

"Despite credit growth and balance of trade deficit decelerating to healthy levels, partly owing to the tight monetary policy adopted by the authorities especially during 1H2012, the rate cut came in as a surprise with country’s headline inflation remaining sticky at high single digits (November 2012 point-point inflation rose to 9.5% from 8.9% in October 2012). With the CBSL revising its GDP growth forecast down to 6.8% for 2012E from 7.2% previously, we believe that the authority is likely to prioritise growth over inflation in 2013E as the rate cut came in earlier than expected. While the rise in food prices in the recent months occurred due to supply side issues, we believe inflation should correct in the near term on account of more normal weather conditions.

"We however expect further rate cuts to stimulate investments (as investment to GDP ratio in the broader economy is expected to be stimulated only by relatively larger dips in AWPLR and T-bill yields) in order to boost economic growth in the medium term. Consequently we expect interest rates to decline (with 12M average T-bill yield slightly revised down to 12.9% in 2013E from 13.0% previously) in the short term (1H2013E) but rise in 2H2013E owing to expected crowding-out in the private sector borrowings on account of the shift in the Government of Sri Lanka’s 2013E deficit financing mechanism.

"While lower short term interest rates would naturally benefit highly geared companies (although not directly addressing operating level weaknesses) and encourage greater demand for credit, other beneficiaries also exist; - Businesses which depend on (low cost) debt capital to promote sales, i.e. land and property, motor vehicles, consumer durables etc., should benefit as sales are likely to improve amidst lower financing costs. - Leasing companies which run a maturity mis-match (i.e. borrow short-variable, and lend long-fixed) will benefit from a lower rate environment improving their NIMs, apart from the benefits of greater demand for credit. The reduction in interest rates should meanwhile boost equities, by both encouraging a switch from fixed income instruments into equities and by increasing corporate profits of debt-carrying companies," CT Smith Stockbrokers said.

Earlier, economists had been skeptical the Central Bank would have enough space to ease monetary policy.

No foreign commercial borrowings...

The government proposes not to go for any foreign commercial borrowings next year, according to the 2013 budget, but domestic non bank borrowings will surge in order to finance a growing fiscal deficit.

According to 2013 budget proposals the government will not seek foreign commercial loans next year after borrowing Rs. 109.5 billion in 2011 and Rs. 128 billion in 2012.

With the budget deficit estimated at Rs. 507.4 billion next year, the government hopes to raise Rs. 86 billion from foreign sources to finance the deficit, a sharp decline from Rs. 205.6 billion estimated for this year, while domestic borrowings are estimated at Rs. 421.4 billion, almost doubling from 259.6 billion in 2012.

Non bank domestic borrowings are expected to carry the weight of the deficit, surging to Rs. 289.4 billion next year from 84.6 billion this year.

"Non bank borrowings will be high next year. This means more funds would be mobilised by selling Treasury bills and bonds to the public and borrowing from EPF, NSB and Sri Lanka Insurance," Institute of Policy Studies Executive Director Dr. Saman Kelegama said, addressing a post budget seminar organised by the Sri Lanka Economic Association and Alumni Association of the University of Peradeniya (Colombo Branch) last month.

"For such borrowings to be effective interest rates would have to be attractive and this, among other factors, implies there is limited space for a reduction in policy interest rates," he said.

Dr. Kelegama also pointed out there was limited headroom for additional commercial borrowings from abroad to boost investment and growth.

"Public debt as a percentage of GDP may have declined from 80 percent to 78 percent in 2012, but the stock of foreign debt in total public debt has increased from 7.3 percent in 2003 to 37.5 percent in 2010, thereby raising risks associated with the economy. The share of commercial debt in total public debt has also increased. Within that, the external short-term debt has increased. As a result, despite the decline in the stock of government debt as a percentage of GDP, the external debt service ratio is heading in a risky direction," Dr. Kelegama said.

Off target...

The government’s fiscal policy is under strain this year because authorities failed to take early action to rectify a balance of payments problem last year.

The budget deficit as a percentage of GDP for the first nine months of this year reached 6.44 percent, exceeding the full year’s target of 6.2 percent, as government expenditure grew nearly twice as fast as revenue growth, latest data released by the Central Bank showed.

Tax revenue grew 6.55 percent year-on-year to Rs. 629.5 billion during the first nine months of this year. Non tax revenue reached Rs. 81.8 billion growing 16.19 billion while grants surged 48.48 percent to Rs. 14.4 billion.

Recurrent expenditure grew 9.07 percent to Rs. 851.8 billion while capital expenditure increased by 31.84 percent to Rs. 356.9 billion.

Total government expenditure was up 14.93 percent to Rs. 1,208.7 billion.

The budget deficit for the period January to September 2012 reached Rs. 483 billion, a 26.87 percent increase from the previous year. As a percentage of GDP, this deficit stood at 6.44 percent, as against 5.81 percent a year ago.

The government’s total outstanding debt stock as at end September reached Rs. 6,262 billion, an increase of 23.52 percent from a year earlier. Domestic debt grew 16.15 percent to Rs. 3,280.4 billion while foreign debt grew 32.79 percent to Rs. 2,981.5 billion.

Total outstanding government debt grew by Rs. 1,128.6 billion during the first nine months of this year. According to the 2012 budget, the government’s borrowing limit for the full year is Rs. 1,104 billion.

According to the 2012 budget, the government’s debt requirement for 2012 was Rs. 776.2 billion from domestic sources and Rs. 327.8 billion from external sources. However, by end September 2012, the domestic debt component grew by Rs. 476.2 billion from end December 2011 while foreign debt increased by Rs. 652.2 billion.

Difficult targets...

Moody’s in a recent report said: "According to sovereign ratings agency Moody’s the country’s low government financial strength is constrained by a high debt burden and a high cost of servicing debt.

"Budget deficits are large, although on a gradually declining trend. Losses of state-owned enterprises also contribute to the country’s low savings rate, which at 22% of GDP is well below the investment rate of 30%.

"Averaging 7.9% of GDP between 2001 and 2011, deficits are well above the B- median average of 2.6%. However, the consistent moderation in the deficit from a peak of 9.9% in 2009 to 6.2% and 5.8% budgeted for 2012 and 2013 respectively, demonstrates the government’s commitment to and success in fiscal consolidation.

"Revenues, at 14.2% of GDP in 2012, are the lowest amongst rating peers, barring Cambodia (B2), Dominican Republic (B1) and Pakistan (Caa1). In the past, this has been due to a weak tax base since the Northern and Eastern areas saw little economic activity. While the government has taken steps toward simplifying and broad-basing the tax system, this has not yet translated into a marked improvement in revenue collections," Moody’s said in a special report last week (See The Island Financial Review Saturday, November 17).

"While the projected consolidation in 2013 is encouraging, as in the past, implementation will be key. To this end, achieving targets looks difficult, given that assumptions are based on (a) an ambitious 19.2% increase in revenues (vs. a 14.6% average increase between 2001-11) to 14.5% of GDP in an environment of slowing growth and (b) nominal GDP growth of 15%YoY (this factors in real GDP at 7.5%, vs. our estimate of real growth at 6.5% and nominal growth at 14.4%). We expect slippage to the tune of 60bps to the 5.8% deficit target," the ratings agency said.

Benchmark interest rates plummet
December 12, 2012, 8:53 pm
The Island

Benchmark Treasury bill rates tumbled at yesterday’s (12) primary market auction after the Central Bank cut policy interest rates by 25bps.

The 12-month Treasury bill yield fell by 41bps to 12.45 percent from 12.86 percent a week earlier while the six-month yield fell by 32bps to 11.78 percent from 12.10 percent. The three-month bill yield reached 10.44 percent, down 35bps from two weeks ago, after all bids for this tenure was rejected last week.

The Public Debt Department of the Central Bank had offered maturing Treasury bills amounting to Rs. 12 billion. Bids totalled Rs. 38.8 billion of which Rs. 13.4 billion were rejected.