Is the Sri Lanka Rupee headed towards 125 to the USD or 135? "COLOMBO | Wed Aug 28, 2013 8:20am BST (Reuters) - The Sri Lankan rupee hit an all-time low on Wednesday due to panic buying by importers and dollar short-covering by banks, dealers said, but the central bank governor told Reuters the sharp fall was due to an aberration of small volume trades." [The LKR hit 135 to the USD before settling at 133] The falling rupee is no aberration as described by the CBSL but rather the result of both local and global dynamics. Locally, the currency is coming under severe pressure due to foreign currency payments that need to be made on account of massive loan repayments both by the Government and loss making SOEs and globally given the receding tide of money that came in to emerging markets during the last few years. The stubborn fact is that the LKR instead of strengthening to 125 to the USD as assured by the Central Bank; is weakening towards 135 to the USD. We are not certain what the specific impact of the infamous USD 875 million four to six year Treasury bond investments by Templeton that came in at the end of August 2009 is having on the currency as part of it is becoming due now. However we are quite certain that the roughly 13 percent coupon would have yielded Templeton an amazing 9 percent on an annualized basis at the end of the four year term even after the currency having fallen to LKR 133 to the USD from the 115 levels during the period of investment. The return would have been higher if conversions took place before the recent sharp depreciation, and no doubt that was done. It must also be noted that many unanswered questions remain as to why the monetary board decided not to reduce policy interest rates days before this investment came in surprising the entire market but did so just days after Templeton locked in at the higher rate for the bonds. Notwithstanding all of this, it is becoming clear that global investors are being selective this time around and countries with weak fundamentals are getting punished; particularly those with large trade imbalances and significant short term foreign debt. Sri Lanka falls in to this category. In fact, all three global rating agencies have already warned that we are vulnerable to capital outflows. Fitch cautioned of ‘red indicators’ on external financing, Moody’s warned of our ‘external vulnerability index’ was way above the threshold level and S&P recently ranked our banking sector as being in the ‘very high risk’ category; all matters of serious concern even though the Central Bank in its now usual style has dismissed all these observations and stated publicly that we have shown the world a unique development model. The UNP notes with serious concern the ‘force’ that is being applied on state banks to ‘somehow’ borrow overseas after the Government has for all practical purposes hit the maximum possible limit. Of particular concern is the borrowing that NSB is purportedly seeking of up to USD 1,000 million at rates perhaps close to USD 7.5 percent per annum that are clearly not going to be beneficial to NSB. Using the proceeds to fund ego boosting white elephants, as we now see all over this country, and to push others including Bank of Ceylon, DFCC Bank and NDB Bank for the same will certainly have disastrous outcomes. The Reuters story is here uk.reuters/article/2013/08/28/uk-srilanka-rupee-idUKBRE97R08Q20130828
Posted on: Wed, 28 Aug 2013 14:03:36 +0000
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