Recent extension of the IMF agreement until June 2020 would help boost investor confidence. The IMF agreement was earlier temporally halted amid the political crisis that commenced on October 26, 2018, First Capital Research said in its ‘First Capital Fixed Income Report (FC FI)’ released yesterday.
In their last FC FI Recommendation Report on May 16, the company recommended to significantly cut portfolio exposure to 40 from 70 amid the fall in yields well below its yield curve bands.
“We expected Sri Lanka’s foreign reserve to drop to USD 6 .7 billion after repaying USD 500 million sovereign bond maturity and USD 250 million project loan payments in April 2019. Surprisingly foreign reserves had dropped only by USD 417 million to USD 7.2 billion in April 2019 from USD 7. 6 billion in March, suggesting additional inflows into reserves.
Further the net surplus liquidity in the system (including term repo) is likely to be sustainable with the Central Bank of Sri Lanka (CBSL) discontinuing reverse repo and also gradually reducing CBSL Holdings on Government Securities.
CBSL has already secured 65 of the total USD commitment for this year through issuance of USD 2.4 billion sovereign and USD 344 million SLDB. We expect balance commitments to be met via USD 1 billion Sovereign Bond backed by the World Bank (Policy Based Guarantee with a longer term repayment of over five to ten years and Samurai Bonds from the Japan Bank for International Cooperation, Panda Debt and term loan as indicated by the CBSL Governor.
These potential facilities are expected to maintain reserves above USD 7 billion during June to December 2019. Sri Lanka’s next large local SLDB repayment is due in March 2020 and international sovereign repayment in October 2020.
Reduction in yield curve bands improved indicators in the First Capital Economic Health Score suggest a lower risk profile as Sri Lanka returns to the situation prior to October 2018 in terms of economic health, justifying a lower yield expectation in the bond market similar to the same period.
Thereby, the company said they reduce its yield curve band expectations across the yield curve by 50 bps.
First Capital Holdings PLC is an investment bank and is the pioneer non-bank affiliated Primary Dealer in Treasury Bills and Bonds in Sri Lanka. With a track record of over 25 years, the Company was the first licensed primary dealer appointed by the Central Bank, and is also the only listed and rated primary dealer in Treasury Bills and Bonds in Sri Lanka.
First Capital delivers the only source for fixed income research in the local financial services industry. The Company’s best-in-class research team provide dynamic reports including economic reviews and proprietary research, encompassing fundamental, quantitative and technical analysis.