CB holds rates steady, wants PS growth

Tuesday, 18 February 2014 00:01 - - {{hitsCtrl.values.hits}}

Private sector credit grows marginally
Industry and services record Rs. 200b loan growth y-o-y
Says room for lending rates to decrease more

The Central Bank kept policy rates unchanged on projections of steady inflation and continued foreign inflows yesterday, but called on the private sector to push for more growth. The Central Bank decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) unchanged at their current levels of 6.50% and 8%, respectively. Central Bank Governor Ajith Nivard Cabraal urged businesses to take advantage of the infrastructure development provided by the Government to expand investment and spur growth. “There has been a fair amount of infrastructure development that has taken place, which has still not yielded the results that we wanted to. There is huge capacity that has been built up over the last couple of years and that capacity also now needs to be utilised a little bit more by the business sector. We will be watching closely to see whether that capacity would now be turned into real economic activity. If that happens, it would give us another growth momentum without the accompanying inflation that could sometimes arise if not,” Cabraal told Bloomberg. However, the Central Bank said business activity was increasing. Provisional data available for December 2013 showed that the growth of credit extended to the private sector by commercial banks bottomed out, with its year-on-year growth accelerating marginally to 7.5% from 7.3% in the previous month. The Quarterly Survey on Commercial Bank Loans and Advances depicted a robust growth in accommodation provided to Industry and Services sectors facilitating the growing economic activities. Accordingly, in absolute terms, outstanding loans and advances granted to Industry and Services sectors by commercial banks recorded a growth of Rs. 200 billion in 2013 compared to the increase of Rs. 167 billion in the previous year. Nonetheless, agriculture and consumption related pawning advances declined. Going forward, private sector credit is expected to record a growth of around 16% in 2014, with overall broad money (M2b) growth of around 14%. The bank has also noted lending rates have room to decrease further after the standing lending facility rate was trimmed by 50 basis points in January. “We think that the next couple of months should stay on course as we have right now because it is a little too early to see if growth momentum has changed in any way. Initial figures that we have been receiving tell us that the momentum is there; there is no change, it’s not too much, it’s not too little. So I think the way inflation has also been behaving is appropriate,” Cabraal noted in his short interview. Going forward, the effect of the tapering of the US Quantitative Easing (QE) program on the Sri Lanka economy is expected to be minimal as a result of the prudent policies that have consistently been in place to attract investors who have a serious and long term view of the Sri Lankan economy, the statement said. That position has been confirmed by the fact that, so far during the year (up to 10 February 2014), even after the QE tapering has been in progress, the net inflows to the Sri Lankan bond and stock markets have amounted to US$ 119 million, although many emerging economies have experienced the reverse phenomenon. “Reflecting continued foreign currency inflows, the Central Bank has so far absorbed US$ 58.7 million on a net basis from the domestic foreign exchange market during this period while the rupee has remained stable, appreciating against the US dollar by 0.03% so far during the year,” it added. Gross official reserves have also remained at comfortable levels, equivalent to around 5.3 months of imports. The Central Bank expects inflation to remain at 5% in 2014 “supported by well-managed demand conditions and improved domestic supply.” In January inflation dropped to 4.4% from 4.7% in December and inflation levels have remained at single digit levels for about five years.

Secondary bond market activity increases

The Central Bank holding rates steady seemed contrary to market expectations, and resulted in a considerable increase in the secondary market bill and bond yields during the early hours of trading, Wealth Trust Securities said yesterday. The report noted with the two liquid 2018 maturities (i.e. 1 April 2018 and 15 August 2018) quoted at intraday highs of 9.05% and 9.10% respectively. This was in comparison to the previous week’s closing levels of 8.91/97 and 9.01/08. However, as a result of buying interest at these levels the yields closed the day marginally lower at levels of 8.94/98 and 9.04/10. In the meantime the 1 April 2016 and 1 May 2021 maturities were quoted at levels of 7.55% to 7.65% and 9.70% to 9.85%. Lack of importer dollar demand saw the rupee close the day marginally higher at Rs. 130.83/85 against its previous day’s closing of Rs. 130.84/87. The total USD/LKR traded volume for the previous day (13 February 2014) stood at US$ 26.84 million. Given are some forward dollar rates that prevailed in the market: three months – 131.37; three months – 132.29; and six months – 133.74.

Cabraal takes on tweeps

Perhaps following in the footsteps of President Mahinda Rajapaksa, Central Bank Governor Ajith Nivard Cabraal yesterday took a stab at social media with an hour-long exchange on Twitter, answering questions on a range of topics, from financial sector consolidation to recovering lost coins of pilgrims. The wide-ranging discussions attracted a slew of questions from ‘Tweeps,’ some of whom made multiple queries. In fact one Twitter user described the exchange as being akin to “speed dating”. The Central Bank Governor noted that inflation was on a downward trend and defended the credibility of statistics compiled by the State-run departments. In a nimble exchange, some questions were left unanswered but the Governor did take time to assure that an unspecified bank had been given the go-ahead to link Sri Lanka to PayPal and make it available to locals. Local BPO companies would have to face up to challenges from a competitive market while the Central Bank Chief assured the quota of income families spend on food as a percentage will decrease gradually as earnings increase. Questions on debt ratio were also posed but the Governor insisted that the issue was under control and “is on a downward trend”. “Merger decisions will be driven by preferences of the merging organisations,” Cabraal insisted, when asked the rationale behind the proposed reduction of finance companies. He also stressed: “Banks have been requested to tighten their spreads and to become more efficient.” Recovering coins from Indian temples left there by thousands of Sri Lankan pilgrims is a point that the Central Bank is still “working on”. “FDI will come into SL from many sources including the six hubs and traditional activities,” he said, striking an optimistic note. In response to a question on whether the Northern Chief Minister C.V. Wigneswaran will be allowed to raise development funds independently through grants, Cabraal emphasised that the necessary funds had already been made available by the Government and any funding would have to be routed through the same source. Cabraal wrapped up the session with “that’s it for now. It is challenging to respond to interesting questions in 140 characters!” and then later Tweeted he hopes to “do it again”.