ECONOMYNEXT – External conditions for the Sri Lanka rupee will be better in 2019, following a steep fall in 2018 and foreign investors will return to domestic bonds with US yields also expected to moderate, economists who track South Asia at an international bank said.
In 2018 foreign investors sold Sri Lanka rupee bonds amid a rate cut in April as confidence in the island’s currency peg waned.
Data shows that foreign investors have became net buyers in February 2019.
"Most of the outflows have already happened," Standard Chartered Bank’s South Asia Economist Saurav Anand said in Colombo.
"If you look at the dynamics of the market, there’s more likely going to be inflows than outflows," Anand said.
Foreign holdings in Treasury bills and bonds were nearly 900 million US dollars last week, around half the volume held a year earlier, according to the Central Bank data, with foreigners buying into bonds from earlier this month.
However, the Central Bank has now limited foreign ownership in rupee bonds to 5 percent of the total, instead of 10 percent to limit any hit on the currency.
Currently, foreign holdings are around 3 percent.
"We can’t expect a billion to come back," Anand said, due to the limit.
"We’re already close to around 900 million US dollars so additional inflows that can come are around 600 million US dollars."
Standard Chartered ASEAN and South Asia FX Research Head Divya Devesh said Sri Lanka’s rupee is likely to fare better in 2019 than last year.
"The external environment is more friendly for the rupee," he said.
"The domestic picture is going to be mixed," he said, referring to the current account deficit and high foreign debt repayments.
"2019 is probably going to be much better than 2018."
"We’re going to see more range-bound dollar-rupee trading environment in 2019 unlike in 2018 where there was one-way rupee depreciation."
The rupee fell from 153 to 182 against the dollar in 2018.
"Given that we had almost a 20 percent correction last year in nominal terms, from a valuations point of view the rupee is no longer as overvalued as it used to be," Devesh said.
As maturing foreign debt is repaid this year, confidence on the rupee will rise, he said.
He said the dollar will help, as it is expected to fall after having reached an overvalued peak.
Yields of US Fed securities are also expected to fall, making bonds in emerging markets more attractive.
"We’re quite positive on US Treasuries with 10-year and 30-year yields have scope for moving lower even from current levels," Devesh said.
"So I think US rates are not going to be much of a problem for emerging markets."
He said oil prices are unlikely to put pressure on the rupee as well. (Colombo/Feb20/2019)