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Sri Lanka capital market minister to discuss margin loans with lenders

ECONOMYNEXT – Sri Lanka’s State Minister for Capital Markets and Money, Nivard Cabraal said he planned to have talks with lenders over margin credit as falling stocks triggered forced selling.

Sri Lanka stocks have fallen sharply after an unusually strong rally up to January 2021, which was partly driven by low interest rates coming from historically loose monetary policy.

In recently days falling stock prices have triggered margin calls. By Thursday Sri Lanka stocks had lost over 730 billion rupees in value from a January market cap of 3.78 billion rupees.

“Requested @CSE_Media to allow broker #credit based on total portfolio & not force-sell individual #stocks: will also soon discuss this matter with #Banks & other lenders to arrive at a suitable solution,” Minister Cabraal said in a twitter.com message.

Sri Lanka is recovering from a Coronavirus induced economic shock compounded by credit downgrade driven by monetary instability and a tax cut.

Many capitalist export firms are doing well while state-protected Mercantilist domestic producers or so-called ‘crony’ import substitution firms have also made record profits from gauging a Covid-19 hit population amid import controls.

Most firms are also benefiting from low interest rates, though there are concerns over bank non-performing loans. The current administration also cut taxes.

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“The performance of many companies this year is definitely on the rise. The @CSE_Media’s overall PEs are low,” Cabraal said in a twitter.com message.

“The Rupee’s holding value. #interest rates are low. There’s ample room for the market cap to grow. It’s time to hold or buy.”

“On a medium term perspective, the mkt cap of Sri Lankan listed companies should be well over Rs.4.5,” Cabraal said.

“It’s only Rs.3.0trn now. Those who are selling at current #ASPI levels are surely making a mistake.”

On Friday stocks ended higher ending a four day slide after Minister Cabraal’s tweets.

Sri Lanka stocks have been in the doldrums for over five years from monetary instability and negative output shocks coming from discretionary ‘flexible’ inflation targeting and a ‘flexible’ exchange rate involving neither a credible external anchor nor a credible domestic anchor, triggering currency crises each time the credit system makes a recovery.

Analysts have suggested that the interest rates being used as a final target instead of an intermediate one as a key underlying trigger for monetary instability. There have been calls for central bank reform to bring monetary stability.

Before the Coronavirus crisis, many firms were trading at single digit price earnings multiples. After gains in 2020 and early 2021, multiples are in double digits but below some foreign markets. (Colombo/Mar05/2021)

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