Sunday, March 20, 2016

Foreigners sell US$200mn worth Sri Lanka rupee bonds over two weeks

ECONOMYNEXT - 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 investor 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.

From June, instead of allowing the interbank overnight rates to move to the ceiling corridor rate after excess liquidity ran out, the central bank instead monetized debt and injected tens of billions of rupees of liquidity below the policy rate.

Reverse repo auction were also conducted to inject money into the system below the ceiling policy rate and further push domestic credit and mal-investments especially in motor cars.

Some interbank trades conducted at market rates were also reversed.

Analysts warned the central bank last year not to conduct imprudent monetary policy and undermine credibility in the rupee soft-peg, by manipulating interest rates while simultaneously trying to control the exchange rate, when the policy errors started.

Sri Lanka's credit already in speculative, was downgraded deeper into junk. The country is now seeking a bailout from the International Monetary Fund.

"But in Sri Lanka and other 'soft-pegged' countries - where central bank repeated tries to print money and try to control the exchange rate at the same time - policy corrections come only after a lot of reserves are lost and following advice from the International Monetary Fund and perhaps after a credit or outlook downgrade," EN's economics columnist Bellwether warned last year in the column Sri Lanka knocks hard at BOP crisis door.

It is not clear why the central bank acts in this way to generate balance of payments trouble and bust the currency and impoverish an entire population, every time the credit cycle turns.

"Up to now foreign investors have not been taking much action," Bellwether warned even earlier in the column Sri Lanka on risky pro-cyclical path as credit expands, shortly before the deadly April rate cut.
"Past episodes show that rating agencies and foreign bond investors take time to understand the problem, giving enough time for corrective action."

"With foreign investors in debt markets, it is not possible to take the same fiscal risks as the 1980s or 1990s and get away with it.

"It is also not possible to take the same monetary risks either. Credibility of the peg and policy in general now matters more than it did before," Bellwether said.

Economists have called for reform of the central bank or its abolition in favour of a currency board to restrain the agency's ability to de-stabilize the economy by manipulating interest rates down.

A restrained central bank will also put pressure on fiscal authorities, as they will not be able to impose 'sovereign default' on the population through currency depreciation behind their back.

Despite the attempts to manipulate rates down (the April rate hike has since only been reversed though cash injections below the ceiling rate has stopped) banks on their own have raised deposit rates as liquidity tightens, pointing the country back towards macro-economic stability.

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