An Echelon Media Company
Wednesday March 29th, 2023

Sri Lanka overnight injections top Rs400bn amid sterilized interventions

ECONOMYNEXT – Sri Lanka’s gross overnight liquidity injections topped 400 billion rupees by mid December as money was printed to offset dollar sales by the central bank (sterilized interventions) and sell downs of a Treasuries stock held outright.

The estimated Treasury bill stock of the central bank had also topped 1.8 trillion rupees, based on available data.

The central bank started to sell down its disclosed Treasury bills stock held outright which peaked at 1,469 billion rupees due to failed bill auctions coming from an obsession to control interest rates, after price controls on Treasuries auctions were removed.

However the central bank was unable to sell down the bills permanently, as the credibility on an exchange rate peg was lost due to earlier money printing, which had made outflows exceed inflows (a balance of payments deficit) and the emergence of parallel markets due to partial convertibility.

Any convertibility provided (dollars exchanged for rupees to protect the exchange rate from printed money also called an ‘intervention’) leads to a liquidity shortage, which is then re-filled with printed money (sterilized) preventing a correction in rupee reserves of banks and the reserve money, triggering more credit and imports.

In November the central bank sold 310.64 million dollars to exchange for already existing money and has injected about 60 billion rupees to sterilize the intervention and maintain the 6.0 percent policy rate.

Sterilized interventions to maintain a policy rate is the key tool through which Latin America central banks destroy currencies and end up in debt default even when budgets are in surplus.

“Sterilized outflows was the key tool through which Argentina style central banks sought to resist the balance of payments,” explains EN’s economic columnist Bellwether.

“In the frenzy of Keynesian interventionism in the post-Depression era, this idea led to the wholesale collapse of gold standard central banks as economies recovered. Later sterilized forex sales led to the collapse of soft-pegged currencies in post independent nations creating social unrest.

“The same argument was used to break stable currency boards and move towards “active” versus “passive” balance of payments policy, with devastating consequences for those countries and the poor. These countries were doomed be emerging or Latin American basket cases forever.”

Goh Keng Swee, Singapore’s first finance minister who retained the currency board, said countries with such central banks were doomed to be ‘miserable developing countries.’

“..[W]e wanted to indicated to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore,” Goh said in a landmark speech.

“A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.”

The Monetary Authority of Singapore, which was later modified to appreciate the currency in the wake of bad Fed policy, blocks sterilized sales through a law requiring 100 percent foreign reserve backing for the monetary base and no policy rate.

The Singapore dollar which was 3.0 to the US dollar when the Bretton Woods collapsed appreciated to 1.2 to the US dollar with each inflationist policy errors of the Fed.

“These mistaken ideas were propagated by US academics like John Henry Williams (key currency advocate) and Arthur Bloomfield, a colleague of John Exter who found instances when gold standard central banks supposedly engaged in sterilized interventions,” Bellwether says.

“That is why in the end the Bretton Woods collapsed and Sri Lanka is suffering now despite rupee bonds being rolled over.

“They taught at Harvard and Princeton so generations of susceptible young people were brainwashed with these ideas.”

Related

Hayek’s warning: lost generation economics kill Sri Lanka’s social market economy attempt: Bellwether

In Sri Lanka’s Latin America style clause of open market operations was put as Section 90 of the US driven monetary law.

“The principle use of open-market operatiosn would ordinarily be to offset the effects of surpluses and deficits in the balance of payments,” Exter explained in 1949.

Exter, who seems to have been a partial skeptic of Keynesianism however cautioned in his paper and advised not to try to resist any fundamental changes in interest rates through liquidity injections and built in warnings into the law itself such as through Section 89 (1) (a) where he advised the central bank “not to alter fundamentally movements in the market resulting from basic changes in the pattern or level of interest rates.”

To break a cycle of sterilized interventions a float or higher interest rate are required.

On November 24, the book value of central bank’s Treasuries stock was 1,767 billion rupees according to official central bank data, though the disclosed number was 1,387 billion rupees, with overnight and term repo injections not counted.

The central bank stopped disclosing the full Treasury bill stock after it stopped giving bills to depositors in its excess reserve window (Standing Deposit Facility) reducing transparency of balance sheet data.

The estimated Treasury Bill stock of the central bank had gone up to around 1,830 billion rupees by November 30 compared to a disclosed number from around 1,750 billion rupees by end October.

The disclosed number of Treasuries held outright was shown to fall to 1,433.91 billion rupees on November 30 from 1,466.84 billion on October 29.

By December 16 the estimated bill stock had gone up further to 1,850 billion rupees based on available data after taking out repo transactions.

It includes 103.5 billion rupees injected to sterilize a reserve ratio hike, an unusual move also made to enforce the policy rate after the reserve ratio hike.

The central bank also started repo auction on November 17 in a bid to take out liquidity injected to short banks overnight from plus banks, both overnight and through term repos.

By December 16, 24.5 billion rupees had been withdrawn through term auctions and 39.15 billion rupees overnight. (Colombo/Dec17/2021)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka stocks weaken for the second session on profit taking

ECONOMYNEXT – Sri Lanka’s stocks closed weaker on Tuesday for the second consecutive session mainly driven by month-end profit-taking by investors, according to brokers.

The main All Share Price Index (ASPI) closed down 0.56 percent or 51.81 points to 9,233.40.

The market has been on a downward trend since last week as investors are adopting a wait-and-see approach until more clarity is given regarding local debt restructuring after the International Monetary Fund approved the extended loan facility.

“The market is down as the selling trend continues,” said Ranjan Ranatunga of First Capital Holdings, speaking to EconomyNext.

“As there is a price decline in all shares across the board, combined with the month ending followed by margin calls, the market continued on a downward trend.”

The market generated a slow and thin turnover of 860 million rupees.

The main contributor to the turnover is Lanka IOC, following news that the Sri Lanka cabinet has granted approval for three oil companies from China, the United States, and Australia in collaboration with Shell Pl to lease 150 fuel stations for each company to operate in the local market.

The fears of debt restructuring mainly affected the banking and financial sectors, which dragged the index down for the day.

The market saw a net foreign inflow of 30.9 million rupees, and the total offshore inflows recorded so far in 2023 are 1.01 billion rupees.

The most liquid index, S&P SL20, closed 0.81 percent or 21.68 points down at 2,656.30.

The market saw a turnover of 860 million on Tuesday, below this year’s daily average of 1.8 billion rupees.

Top losers were Vallibel One, John Keells Holdings, and Hatton National Bank.

Analysts said the downward trend is expected to continue for the rest of the week as profit-taking is expected to continue. (Colombo/March28/2023)

Continue Reading

Sri Lanka rupee closes weaker at 325/328 to dollar, bond yields up

ECONOMYNEXT – Sri Lanka’s treasury bond yields were up at close on Tuesday and the rupee closed weaker in the spot market, dealers said.

A 01.07.2025 bond was quoted at 31.20/60 percent on Tuesday, up from 30.75/31.00 percent on Monday.

A 15.09.2027 bond was quoted at 28.25/29.00 percent, up from 28.10/60 percent from Monday.

Sri Lanka rupee opened at 325/328 against the US dollar steady, from 322/325 from a day earlier. (Colombo/ March28/2023)

Continue Reading

Sri Lanka Telecom on track rating upgrade track on planned stake sale: Fitch

ECONOMYNEXT – Sri Lanka Telecom has been place on watch for a possible rating upgrade after the government, which has defaulted on its sovereign debt said it will sell down its majority stake.

“The rating reflects the potential rating upside due to weakening linkages with SLT’s parent, the government of Sri Lanka (Long-Term Local-Currency Issuer Default Rating: CC), due to the government’s plan to sell its 49.5 percent stake in the company,” the rating agency said.

“Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which
may take more than six months.”

The agency said it expect SLT’s revenue growth to slow to a low single-digit percentage in 2023 amid weakening consumer spending due to consumers increasingly prioritising essential needs, such as food and medicine, as real income has fallen significantly following the currency depreciation and unprecedently high inflation.

The full statement is reproduced below;

Fitch Places Sri Lanka Telecom’s ‘A(lka)’ Rating on Watch Positive

Fitch Ratings – Colombo – 27 Mar 2023: Fitch Ratings has placed Sri Lanka Telecom PLC’s (SLT) National Long-Term Rating of ‘A(lka)’ on Rating Watch Positive (RWP).

The RWP reflects the potential rating upside due to weakening linkages with SLT’s parent, the government of Sri Lanka (Long-Term Local-Currency Issuer Default Rating: CC), due to the government’s plan to sell its 49.5% stake in the company. Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which may take more than six months.

SLT’s ratings are currently constrained by its parent’s weak credit profile under Fitch’s Parent and Subsidiary Linkage (PSL) Rating Criteria. SLT’s Standalone Credit Profile (SCP) is stronger than that of the state, reflecting the company’s market leadership in fixed-line services, second-largest share in mobile, ownership of an extensive optical fibre network and a strong financial profile. The extent of SLT’s rating upside, following the proposed disposal, will depend on the credit profile of its new parent, the linkage strength with SLT according to our PSL criteria, and the proposed funding structure.

KEY RATING DRIVERS

Disposal Plan: SLT announced on 20 March 2023 that the Sri Lankan cabinet has granted in-principle approval to sell the 49.5% stake in SLT held by the state. The disposal is part of a plan to restructure state-owned entities (SOEs) to improve the state’s financial position. SLT said steps have yet to be taken to identify potential buyers and it will take at least eight to 12 months to finalise the transaction. We believe the government will push through the disposal as SOE restructuring is an integral part of the IMF’s financial support to Sri Lanka.

Sovereign Ownership Pressures Rating: We assess the legal ring-fencing and access and control between SLT and the state as ‘Open’ under the PSL criteria, given the absence of regulatory or self-imposed ring-fencing of SLT’s cash flow and the government’s significant influence over the subsidiary’s operating and financial profile. SLT’s second- biggest shareholder, Malaysia-based Usaha Tegas Sdn Bhd with a 44.9% stake, has no special provisions in its shareholder agreement to dilute the government’s influence over SLT.

Higher Rating: However, the PSL criteria allows for a stronger subsidiary to be notched above the weaker parent’s consolidated profile in extreme situations, such as when a parent is in financial distress but the subsidiary continues to operate independently and its banking access appears unaffected. We do not believe SLT is at risk of default in the next 12 months, as it has sufficient liquidity and its debt does not carry cross-default clauses that can be triggered by the parent’s distress.

SLT’s ‘A(lka)’ rating therefore reflects its relativities with national peers, but is still below its SCP due to the drag from state ownership. We apply our PSL criteria because our Government-Related Entities (GRE) Rating Criteria states that in cases where the SCP of the GRE is higher than the government’s IDR, the relevant considerations of the PSL criteria will be applied to determine whether the IDR of the GRE is constrained or capped at the government’s rating level.

Weak Demand in 2023: We expect SLT’s revenue growth to slow to a low single-digit percentage in 2023 amid weakening consumer spending. Consumers are increasingly prioritising essential needs, such as food and medicine, as real income has fallen significantly following the currency depreciation and unprecedently high inflation. SLT’s subscriber numbers and minutes of usage have already fallen in 2022. Competition has also intensified, especially in the mobile segment, leading to lower realisation of recently introduced tariff hikes.

Weak demand should be offset to an extent by increased migration to SLT’s fibre-to-the- home (FTTH) network, from its own copper network, and subscriber additions. FTTH carries higher revenue per user than the copper network. SLT had 475,000 FTTH connections, a 35% increase yoy, by end-2022.

Weakening Profitability: We expect SLT’s EBITDA margin to narrow to around 34% in 2023 (2022: 35.6%) amid lower demand and ongoing cost escalations. All telecom operators increased tariffs by 20%-25% in late 2022 to tackle falling margins. However, the realisation into revenue remains weak, especially in the mobile segment, due to deep price cuts by one of the smaller operators and falling demand. SLT’s fixed-line business is able to maintain stable EBITDA margins due to the recent tariff hike and the FTTH segment’s higher revenue per user.

Leverage to Stabilise: We expect SLT’s EBITDA net leverage to remain around 1.3x in 2023 (2021: 0.9x, 2022: 1.3x) amid falling profitability. However, its leverage is strong for the rating. We expect capex of around LKR25.0 billion annually over 2023-2024 on network upgrades and expanding its fibre infrastructure.

Interest-Rate Hikes, Currency Depreciation Manageable: We expect SLT to maintain its EBITDA interest coverage closer to 4.0x over 2023-2024 (2022: 4.4x) despite interest rates rising almost threefold. Most of SLT’s debt is on variable interest rates, which will raise costs. SLT’s foreign-currency revenue, which accounts for 10%-12% of group revenue, is more than sufficient to meet the group’s foreign-currency operating expenses and interest costs. SLT had around USD10 million in foreign-currency debt at end-
December 2022, compared with USD40 million in foreign-currency cash deposits.

Sector Outlook Deteriorating: Fitch expects the average 2023 net debt/EBITDA ratio for SLT and mobile leader Dialog Axiata PLC (AAA(lka)/Stable) to remain around 1.3x (2022: 1.3x) amid weak margins and high capex. We expect sector revenue growth to slow to 8% in 2023 (2022: 15%), while the average 2023 EBITDA margin for SLT and Dialog should narrow to 31% (2022: 32%) amid low usage and high costs.

DERIVATION SUMMARY
SLT’s SCP benefits from market leadership in fixed-line services and the second-largest position in mobile, along with ownership of an extensive optical fibre network. SLT has lower exposure to the crowded mobile market and has more diverse service platforms than Dialog. However, Dialog has a larger revenue base, lower forecast EBITDA net leverage and a better free cash flow (FCF) profile than SLT. Dialog is rated at ‘AAA(lka)’, while SLT’s rating is under pressure because of the state’s weak credit profile.

SLT has a larger operating scale than leading alcoholic-beverage manufacturer Melstacorp PLC (AAA(lka)/Stable), which distributes spirits in Sri Lanka through its subsidiary, Distilleries Company of Sri Lanka PLC (AAA(lka)/Stable). Melstacorp is exposed to more regulatory risk in its spirits business because of increases in the excise tax, but this is counterbalanced by its entrenched market position and high entry barriers.

Consequently, the company can pass on cost inflation and maintain its operating EBITDA margin, supporting substantially stronger FCF generation than SLT.

KEY ASSUMPTIONS

Fitch’s Key Assumptions within Our Rating Case for the Issuer:

– Revenue growth to slow to 4% in 2023 amid falling subscriber numbers and lower usage due to weakening consumer spending;

– Operating EBITDA margin to narrow by 150bp to 34% in 2023 due to higher costs and lower volume;

– SLT to continue capex on expanding its fibre and 4G network with LKR25 billion spent annually in 2023 and 2024;

– Effective tax rate of 28% from 2023;

– Dividend payout of 33% of net income over 2024-2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– Fitch will resolve the RWP when the proposed disposal becomes practically unconditional, which may take more than six months, and once Fitch has sufficient information on the new majority shareholder’s credit profile and linkages with SLT and the proposed funding structure.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Fitch would remove the RWP and affirm the National Long-Term Rating at ‘A(lka)’ with a Stable Outlook if the proposed disposal does not proceed and the linkages with the state remain intact.

LIQUIDITY AND DEBT STRUCTURE

Manageable Liquidity: SLT’s unrestricted cash balance of LKR14 billion at end- December 2022 was sufficient to redeem its contractual maturities of around LKR11 billion. SLT’s short-term working-capital debt amounted to another LKR10.0 billion and we expect the company to roll over the facilities given its solid access to local banks.

Liquidity is further enhanced by about LKR15 billion in undrawn bank credit facilities, although these are uncommitted. SLT typically does not pay commitment fees on its undrawn lines, although we believe most banks will allow the company to draw down the funds because of its healthy credit profile.

Continue Reading