Fitch cautions over volatile external front

24 June 2015 03:00 am - 0     - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe 
International ratings agency Fitch Ratings warned Sri Lanka against ludicrous policies, persistent uncertainties in the political frontier and weakening foreign reserves while reaffirming the sovereign at ‘BB-’/Stable for the second quarter of 2015.

“A further increase in external vulnerability because of sharp decline in foreign reserves, (and) a deterioration in policy coherence and credibility (will be) leading to a widening of macroeconomic imbalances and a loss of investor confidence,” the report said.

Investor confidence is crucial, as the new regime is planning to drive the economic growth through foreign direct investments instead of through debt instruments.

The report further added that the interim budget did little to rectify the major weaknesses in the fiscal policy, as most of the revenue measures were one-off in nature.

However, it failed to mention that none of the revenue measures in the interim budget were passed as laws in Parliament, despite the approval of the expenditure.

This will be placing a strain on revised government projections of 4.4 percent fiscal deficit in the interim budget as opposed to the original 4.6 percent deficit.
Economists across the country from state universities, as well as think tanks such as the Pathfinder Foundation too, have criticized both the past budgets as well as the interim budget for being economically unsound.

The report also noted that while the transition of power during the Presidential elections was smooth, the uncertainty of Parliamentary elections has weakened investor confidence, which is partly reflected in the current performance of Colombo Stock Exchange. 

Fitch added that investor confidence will seriously affect the foreign reserves.

“Sri Lanka’s foreign-reserve coverage of its current external payments remains narrow, and is vulnerable to shifts in 
investor sentiment. 

That is especially true because foreign holdings of Sri Lankan government securities are high and as domestic political uncertainty currently prevails.”

The rating agency said that while lower oil prices, steady remittances and tourism receipts will support the current account, the recent wage increase and policy rate cuts will lead to higher imports, translating to risks to the current account.

The report said that increased foreign direct investments, improvement in foreign reserves and credible medium term fiscal consolidation which will lead to improved government revenue and GDP are positives Sri Lanka should strive to achieve.

While Sri Lanka has achieved a 7.5 percent 5-year average growth compared to 4.5 percent across similarly rated countries, Fitch noted Sri Lanka’s position in GDP per capita, government debt to GDP and net external debt to GDP are far worse in comparison.



Finance Minister sees sharp rise in rupee in two weeks
REUTERS: Finance Minister Ravi Karunanayake yesterday said that the rupee was set to climb to a two-year high of 130 per dollar from current levels due to ample dollar inflows.

“Today, the dollar is at Rs.133.90. We will bring this to Rs.130 within the next two weeks. There are ample dollars coming into the country,” Karunanayake told Parliament in response to a question raised by the opposition.

The opposition has criticised Karunanayake for mismanaging the economy since he came to power after a January 8 election.

Currency dealers said the government may have knowledge about dollar inflows but said it was unlikely the rupee would appreciate so much within such a short period of time.

If the rupee climbs to 130 per dollar, it would have appreciated 3 percent to a two-year high.

“It is possible if there are inflows and if those inflows go through the market. He (finance minister) may have information what we don’t have. So he may be aware of the inflows,” said a currency dealer asking not to be named.

The rupee’s value is largely decided by the Central Bank as it can direct state banks to buy or sell dollars.

However, another dealer said allowing a 3 percent appreciation is not possible over such a short period.

“I am not sure if the finance minister is being practical. I do not see rupee appreciation given a strengthening dollar, heavy demand for dollars and rising demand for imports.”

The rupee traded steady at 133.90 to the dollar yesterday after hitting a record low of 134.20 last Thursday. 




Rupee ends steady; forwards edge up
Spot rupee ended steady yesterday as a state bank continued to offer dollars at Rs.133.90, while three-month forwards edged up after the Finance Minister said the currency would appreciate sharply in the next two weeks, dealers said.

The spot rupee ended unchanged at 133.90, while three-month forwards closed little firmer at 135.60 from Monday’s close of 135.74, dealers said.

“The government may be trying to use the $500 million foreign currency term financing facility to boost the rupee instead of raising the foreign currency reserves,” a currency dealer said on condition of anonymity.

The government has called on banks and investment houses to propose terms for a foreign currency term financing facility as it seeks to raise up to $500 million to meet the costs of some externally-funded projects stated in its 2015 budget.

The rupee has appreciated around 0.2 percent after hitting a record low of 134.20 on Thursday, with the state bank lowering its dollar selling rate.
 
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