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Saturday March 2nd, 2024

Sri Lanka forex swap rates plunge as outright rupee/dollar market dries up

ECONOMYNEXT – Sri Lanka’s implied forward exchange rates have plunged in dollar/rupee swap markets as money printing depressed rupee yields and the forex shortages and downgrades that came in its wake drove up domestic dollar yields to double digits.

Outright trading in the spot and forward markets have dried up after the central bank ordered dealers not to trade above 200 to the US dollar.

Giving forward cover to importers has already been banned. Interbank forwards are permitted to facilitate swaps.

Swap rates have been quoted and traded at steep discounts implying one year forwards at below 180 rupees with inflation differential inverted despite having a weak currency and money printing draining forex reserves steadily.

Spot/1 year swaps are quoted at a discount of 1700/1500 bp, spot/6 month at a discount of 900/840, the spot/3 month at 475/440, spot/2 month at 310/280, spot 1 months at 150/130 and spot/two weeks at 55/40, market participants said.

Spot trades are not permitted above 200 to the US dollar.

With no trading in the forex market and some running negative net open positions, banks have been forced to limit import letters of credit except to existing clients, market participants said.

Without a working forex market, banks have to run net open positions to cover LCs on the due date.

By buying spot and selling forward through a swap transaction, a bank which is short of forex currency can receive dollars to lend.

Sri Lanka’s central bank has also been receiving dollars through swaps, though the total outstanding has declined recent months, contributing to an overall fall in gross official reserves.

The counter party of the swap who receives rupees can invest the money in treasury bills and buy back the dollars at the discounted rates in the future at which time when the rupee could be weaker.

Effectively the seller at the spot leg gets exchange protection for a rupee investment and also gets paid for it.

Sri Lanka’s central bank offered zero cost swaps for anyone who wants to borrow dollars, though in the market, swaps are going at a discount.

Sri Lanka this week raised fuel prices, in a bid to reduce pressure on domestic dollar markets. However Sri Lanka has over 110 billion rupees of excess liquidity in money markets, indicating potential reserve losses of around 500 million dollars at current exchange rate if credit continues to grow.

Sri Lanka has a soft-pegged exchange rate regime with a sterilizing central bank in the style of several set up in South and Central American and Asia by the Latin America unit of the Federal Reserve to do Keynesian counter-cyclical policy.

Analysts and economists had earlier called for the re-establishment of a currency board which was abolished to create the Latin America style central bank in 1950, to re-establish Singapore, Hong Kong, Macau, Brunei or at least Dubai, Kuwait style monetary stability.

However several of the central banks created, or their original gold standard monetary law were tinkered by Fed ‘money doctors’ have ended up in dollarization. (Colombo/June16/2021)

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Sri Lanka eyes SOE law by May 2024 for better governance

ECONOMYNEXT – Sri Lanka is planning to pass a Public Commercial Business (PCB) Act improve governance of state-owned enterprise by May 2024 as part of an anti-corruption efforts following an International Monetary Fund assessment.

Sri Lanka’s state enterprises have been used by politicians to give ‘jobs of the boys’, appropriate vehicles for personal use, fill board of directors and key positions with henchmen and relatives, according to critics.

Meanwhile macro-economists working for the state also used them to give off-budget subsides or made energy utilities in particular borrow through supplier’s credits and state banks after forex shortages are triggered through inflationary rate cuts.

The government has taken billons of dollars of loans given to Ceylon Petroleum Corporation from state banks.

There have also been high profile procurement scandals connected to SOEs.

An SOE Reform Policy was approved by Sri Lanka’s cabinet of ministers in May 2023.

The Public Commercial Business (PCB) Act has now been drafted.

A holding company to own the SOEs will be incorporated and an Advisory Committee and Board of Directors will be appointed after the PCB law is approved, the statement said. (Colombo/Mar01/2024)

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Sri Lanka rupee closes at 308.80/90 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 308.80/90 to the US dollar Friday, from 309.50/70 on Thursday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.02.2026 closed at 10.65/75 percent up from 10.50/70 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent from 11.90/12.10 percent.

A bond maturing on 01.07.2028 closed at 12.15/35 percent down from 12.20/25 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent up from 12.30/45 percent.

A bond maturing on 15.05.2030 closed at 12.30/45 percent down from 12.35/50 percent.

A bond maturing on 01.07.2032 closed at 12.50/13.00 percent from 12.55/13.00 percent. (Colombo/Mar1/2024)

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Sri Lanka stocks close up 0.37-pct, Expo to de-list

ECONOMYNEXT – The Colombo Stock Exchange closed up 0.37 percent on Friday, and SG Holdings, the parent company of Expolanka Holdings Plc, said it was taking the company private.

Expolanka is the largest listed company on the Colombo Stock Exchange.

“Expolanka Holdings PLC has, at the Board Meeting held on 1st March 2024, considered a request from its principal shareholder and resolved to initiate the de-listing of the Company’s shares from the Official List of the Colombo Stock Exchange subject to obtaining necessary shareholder approval and regulatory approvals,” the company said in a stock exchange filing.

As per arrangements with SG Holdings Global Pte Ltd, the Company’s majority shareholder, it will purchase its shares from shareholders who may wish to divest their shareholding in the Company at a purchase price of Rs 185.00 per share. The share closed up at 150.50.

The broader All Share Index closed up 0.37 percent, or 39.47 points, at 10,691; while the S&P SL20 Index closed down 0.64 percent, or 19.59 points, at 3,037.

Turnover stayed above the 1 billion mark for the sixth consecutive day, registering 1.4 billion.

Crossings in Melstarcorp Plc (135mn) up at 89.50, Hatton National Bank Plc (64mn) up at 158.00, Hemas Holdings Plc (53mn) up at 75.00 and Central Finance Company Plc (26mn) up at 103.50, added significantly to the day’s turnover.

“The upward trend is continuing, with more retail buying also coming in, the number of trades was more than 10,000 today,” a market participant said. “Investors are looking for undervalued stocks and buying in quantities.” (Colombo/Mar1/2024).

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