Currency strategists have expressed fresh concerns over the Sri Lankan rupee (LKR), noting its prospects for 2016 seem rather depressing compared to other regional currencies.
“This is the one currency that I am most worried about in Asia. Fundamentally things are not looking so great,” professed Asia FX Strategist Divya Devesh while commenting on the global foreign exchange (FX) outlook at Standard Chartered Bank Global Research Briefing 2016 held in Colombo.
While weakness in the currency was driven by lacklustre export performance, multiplying the impact was imports, mainly driven by consumption, remaining resilient, he noted.
Foreigners reducing their position in government securities and foreign institutional investment (FIIs) from Rs.500 billion to Rs.300 billion, Devesh asserted the rate cuts have not helped and the risk sentiments remain fragile. “Together it means there will be further depreciation of the currency. The big debate with the rupee is not the direction; it is the base of the depreciation, which is whether it is going to be sharp and abrupt.”
Drawing attention to the Central Bank’s (CB) grim foreign reserve position, Devesh said direct intervention from the monetary watchdog would be limited, which had been the scenario since the move in September 2015 to increase the LKR free float.
On a trade-weighted basis placing the LKR on the positive side of the scale, Devesh said, “It is relatively strong. There was a 5 to 6 percent correction last year, but remains strong when looking back at its performance.
“We are still looking at depreciation. Although we expect it to take a gradual course, there will be a considerable amount of risk.”
While there is confidence in the CB’s ability in ensuring the FX markets remain stable, it was emphasised the nation’s high external debt and weakened currency would be problematic for the government and a number of corporates. “The CB has other means to ensure FX markets remain stable. If you are an importer, I would recommend to maintain a high hedge ratio as the depreciation looks high for the stage,” he opined.