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First Capital’s Dimantha Mathew on the Bond and equity Market performance – 29.05.2019

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Dimantha Mathew, Head of Research, at First Capital on the bond and equity market performance – 29.05.2019
 First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka
 

 

Sri Lanka central bank seen cutting rates to boost growth after Easter attacks: Reuters poll

Reuters |  29 -05 -2019

COLOMBO (Reuters) – Sri Lanka’s central bank is widely expected to cut its key interest rates at a meeting on Friday, a Reuters poll showed, to support the economy after tourism and investment plummeted in the wake of Easter Sunday bombings.

Sri Lanka is unlikely to hit its full-year economic growth target of 3-4% following the bomb attacks, junior finance minister Eran Wickremeratne told Reuters last week.

A Reuters poll has predicted growth would slump to its lowest in nearly two decades this year.

The attack has badly hurt Sri Lanka’s tourism sector – the country’s third-largest and fastest-growing source of foreign currency – while many corporates have put their investment and expansion plans on hold, analysts say.

The central bank has yet to assess the economic impact of the Easter bombings, which killed more than 250 people. Militants Islamic State has claimed responsibility for the attack.

The economy is already struggling with growth slowing to a 17-year low of 3.2% in 2018 as a protracted political crisis and past policy tightenings sapped business confidence and cooled investment.

Seven out of 14 economists surveyed expected the Central Bank of Sri Lanka to cut both of its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) by 50 bps to 7.50% and 8.50%, respectively.

First Capital reduces bond yield bands

Investment-in-Sri-Lanka

Daily News | 28 – May -2019

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.

First Capital sees strong bias for rate cut

Treasury Bills and Bonds in Sri Lanka

Daily Mirror | 29 May 2019

As Easter Sunday attacks further dampens Sri Lanka’s growth prospects, the Monetary Board of the Central Bank faces an inevitable situation to support the economy through a policy rate cut in the third monetary policy review meeting this week, the Colombo-based First Capital Research said.
“First Capital Research allocates a 95 percent probability for a policy rate cut in May 2019 as we are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth,” First Capital stated in its pre-policy analysis report.

 

Given the country’s overly sluggish GDP growth and below par credit growth, First Capital predicted that there is a 60 percent probability for the Monetary Board to cut policy rates by 50 bps while a lower 20 percent probability for a 75bps cut.
“Despite the Road Map towards a single policy rate, we believe a rate cut in both Standing Lending Facility Rate (SLFR) and Standing Deposit Facility Rate (SDFR) is more appropriate considering the severity of the situation.

 
“However, in the case of a 75bps or a 100bps rate cut consideration, though remote, CBSL may consider a lower cut for SDFR.”  Prior to Easter Sunday attacks, First Capital predicted that the Central Bank would likely to cut policy rates by 25bps in second and fourth quarters of the year due to below par GDP growth and contraction of private credit early this year. However, the Easter Sunday attacks brought detrimental impact on key sectors of the economy such as tourism and retail, possibly further slowing down the sluggish economy. Revising earlier GDP growth projection from 4.3 percent to below 3 percent for the year, First Capital stated that it would require a minimum of one year for Sri Lanka to recover from impacts of Easter Sunday attacks.

 
Despite the weakened economic outlook, Sri Lanka’s macroeconomic fundamentals have improved steadily allowing for a potential policy rate cut supporting the revival of the sluggish economy.

 
“Sri Lanka’s strengthened macroeconomic fundamentals led the yield of 5-year bond to decline paving way for a possible policy rate cut,” First Capital noted.

 
In addition, the Central Bank has maintained the foreign reserve position above US $ 7 billion with no sovereign bonds maturities during the second half of the year.

 
First Capital stated that the government and the Central Bank have created a sustained positive liquidity position after lapse of six months resulting from multiple SRR cuts and the government fulfilling its commitments on overdue payments to contractors. Hence, the report noted that the Central Bank could now discontinue daily reverse repo auctions and term reverse repo auctions.

 
Further, First Capital believes that the Central Bank is likely to maintain Statutory Reserve Ratio (SRR)‎ unchanged at current levels while noting there is a  relative small probability of raising SRR amid healthy liquidity levels.

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.

Central Bank rate cut “inevitable”

Daily FT | 29 May 2019

  • First Capital Research says probability rate at 95% 
  • Sluggish growth, Easter Sunday attacks, improved macro fundamentals seen as key reasons 
  • Rate cut also likely given alarming deceleration of private sector credit 
  • Predicts economic recovery will take at least one year, downgrades growth to less than 3%  

First Capital Research yesterday said there is a 95% probability for a policy rate cut when the Central Bank announces its latest monetary policy stance on Friday.

Releasing its policy expectations, First Capital said a rate cut was “inevitable,” given slowing growth and the impact of the Easter Sunday attacks.

“We are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth. Despite the Road Map towards a single policy rate, we believe a rate cut in both SLFR and SDFR is more appropriate, considering the severity of the situation. However, in the case of a 75bps or a 100bps rate cut consideration, though remote, Central Bank may consider a lower cut for SDFR,” the report said.

First Capital Research pointed out that the Monetary Board had previously observed that the continuation of the monetary policy stance was appropriate but had hinted at possible monetary easing. This has since been reinforced by statements from the Government calling for banks to reduce interest rates.

Macroeconomic fundamentals have also steadily improved creating space for a policy rate cut.

The Central Bank maintaining foreign reserve position above $7.0 billion ($7.2 billion by end April 2019) is noteworthy considering the major outflows in April 2019. The International Monetary Fund (IMF) approved the 6th tranche of $164.1 million while granting a one year extension until June 2020, providing a cushion to country’s economy to recover from the recent attacks, pointed out First Capital Research.

“Falling below the Central Bank credit growth projection of 13.5%, private sector credit growth decelerated at an alarming rate to record an YTD growth of 0.5% during the first quarter leading to a contraction in financial sector asset base,” it added.

The Sri Lankan rupee continued to strengthen to close at 176.24 on 22 May, supported by foreign remittance conversions and foreign inflows during the festive seasons. However, REER continued to remain undervalued at 94.74 in March 2019.

A sustained positive liquidity position was created after the lapse of six months resulting from multiple Statutory Reserve Ratio (SRR) cuts and the Government making long delayed payments, providing the ability for the Central Bank to discontinue daily reverse repo auctions and term reverse repo auctions.

“The Easter Sunday attacks are expected to have a detrimental impact on the economy, possibly further slowing down the sluggish economy. We expect the recovery would require at least one year period forcing a downward revision to our 2019 GDP growth projection to below 3% from previous 4.3%.”

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.

Sri Lanka growth may fall below 3-pct in 2019: Report

ECONOMY NEXT – May 28, 2019

Sri Lanka’s economy is expected to grow below 3 percent in 2019 after the Easter Sunday attacks dampened growth prospects, the research arm of First Capital, an investment house, said.

“The Easter Sunday attack is expected to have a detrimental impact on the economy possibly further slowing down the sluggish economy,” FC Research said.

“We expect the recovery would require at least a one year period, forcing a downward revision to our 2019 GDP growth projection to below 3.0 percent from the previous 4.3 percent,” it said.

Even before the bombings, the economy showed signs of further slowdown, due to an extended period of liquidity shortages, and falling private credit, with banks witnessing higher bad loans.

“Falling below the CBSL credit growth projection of 13.5 percent, private sector credit growth decelerated at an alarming rate to record a year-to-date growth of 0.5 percent during the first quarter leading to a contraction in financial sector asset base,” FC Research said.

In the December quarter, growth had been 1.8 percent, as a political crisis and liquidity shortages, especially in the construction sector, suppressed growth.

FC Research said that the central bank is almost certain to cut policy rates to spur growth.

Sri Lanka’s central bank is at the moment keeping overnight rates up using term repo deals to withdraw cash instead of outright sales of bills.

“First Capital Research allocates a 95 percent probability for a policy rate cut in May 2019 as we are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth,” the firm said.

FC Research said that a 50 basis point cut is most likely (60 percent likelihood), followed by a 75 basis point cut, whereas a 25 or 100 basis point cut are less likely.

The last statement from the monetary board in April had said that there was a possibility of a rate cut in May, while Central Bank Governor Indrajit Coomaraswamy, in two seperate occasions over the past 10 days, has said a rate cut was on the cards.

FC Research said economic stability had improved with the International Monetary Fund balance of payment support program being extended till June 2020, and foreign reserves remaining above 7 billion US dollars despite outflows in April. (Colombo/May28/2019)

Rupee Steady as Traders Wait for Rate Move: Inside Sri Lanka

Investment Companies in Sri Lanka

(Bloomberg) — Sri Lanka’s rupee was little changed as investors await the central bank’s monetary policy decision later this week.

* USD/LKR steady at 176.40, after its first weekly decline in three

* The monetary authority is scheduled to announce its rate decision on Friday at 7:30 am local time

* “We could see very low turnover this week as we await the rate decision,” says Dimantha Mathew, head of research at First Capital in Colombo

** “An expectation of a rate cut is likely to weigh on the currency this week,” while bond yields could trade sideways until the rate announcement

* Yield on the nation’s 10.9% bonds due March 2024 rose 7bps Friday to 10.02%, climbing for the first time in seven days

* Overseas investors sold a net $0.4m of local equities on Friday, taking withdrawals this year to $32.6m: exchange data

CBSL likely to cut policy rates: First Capital Research

Ceylon Today | 28 -05 -2019

Previous pre-policy issue; Central Bank gives forward-looking guidance.
The Monetary Board observed that the continuation of the current monetary policy stance is appropriate, while providing forward-looking guidance of possible monetary easing.
Macroeconomic fundamentals steadily improve;
The Central Bank (CBSL) maintaining its foreign reserve position above US$ 7.0 billion (US$ 7.2 billion by end-April 2019) is noteworthy, considering the major outflows in April 2019. The IMF approved the 6th tranche of US$ 164.1 million while granting a one-year extension until June 2020, providing a cushion to the country’s economy to recover from the recent attacks.
Falling below the CBSL’s credit growth projection of 13.5 per cent, private sector credit growth decelerated at an alarming rate to record YTD growth of 0.5 per cent during the first quarter, leading to a contraction in financial sector asset-base.
The rupee continued to strengthen to close at 176.24 to the U.S. dollar on 22 May 2019, supported by foreign remittance conversions and foreign inflows during the festive seasons. However, REER continued to remain undervalued at 94.74 in March 2019.
A sustained positive liquidity position was created after a lapse of six months, resulting from multiple SRR cuts and the Government making the long-delayed payments providing CBSL the ability to discontinue daily reverse repo auctions and term reverse repo auctions.


Easter Sunday attack dampens growth prospects

The Easter Sunday attack is expected to have a detrimental impact on the economy, possibly further slowing down the sluggish economy. First Capital Research (FCR) expects the recovery would require at least a year, forcing a downward revision to its 2019 GDP growth projection to below 3.0 per cent from 4.3 per cent previously.
FCR allocates a 95 per cent probability for a policy rate cut in May 2019, as it is of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth. Despite the Road Map towards a single policy rate, FCR believes a rate cut in both SLFR and SDFR is more appropriate, considering the severity of the situation. However, in the case of a 75bps or a 100bps rate cut consideration, though remote, CBSL may consider a lower cut for SDFR.

Dimantha Mathew, Head of Research, at First Capital on the bond and equity market performance – 27.05.2019

Investment Companies in Sri Lanka

Dimantha Mathew, Head of Research, at First Capital on the bond and equity market performance – 27.05.2019

First Capital is an investment bank offering services as Stock Brokers in Sri Lanka. The Company acts as a conduit between retail and institutional clients and the secondary market of the Colombo Stock Exchange. First Capital’s best-in-class research team provide a series of actionable trade recommendations, daily and periodic market commentaries and publications for Stock Brokers in Sri Lanka.

 
 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.

Sri Lanka’s First Capital Research allocates 95-pct probability for a policy rate cut

rate-cut

May 27, 2019 (LBO) – First Capital Research has allocated a 95 percent probability for a policy rate cut in May 2019 as they are of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth.

“Despite the Road Map towards a single policy rate, we believe a rate cut in both SLFR and SDFR is more appropriate considering the severity of the situation,” a pre-policy analysis of First Capital Research predicted.

“However, in the case of a 75bps or a 100bps rate cut consideration, though remote, CBSL may consider a lower cut for SDFR.”

The Central Bank maintaining foreign reserve position above 7 billion US dollars (USD 7.2Bn by end Apr 2019) is noteworthy considering the major outflows in April 2019.

“Easter Sunday attack is expected to have a detrimental impact on the economy possibly further slowing down the sluggish economy,” the research note said.

“We expect the recovery would require at least 1-Yr period forcing a downward revision to our 2019 GDP growth projection to below 3.0% from previous 4.3%.”

IMF, however, approved the 6th tranche of 164.1 million dollars while granting a one year extension until June 2020 providing a cushion to country’s economy to recover from the recent attacks.

Falling below the Central Bank credit growth projection of 13.5 percent, private sector credit growth decelerated at an alarming rate to record a year-to-date growth of 0.5 percent during the first quarter leading to a contraction in financial sector asset base.

USD:LKR continued to strengthen to close at 176.24 on 22 May 2019 supported by foreign remittance conversions and foreign inflows during the festive seasons. However, REER continued to remain undervalued at 94.74 in March 2019.

A sustained positive liquidity position was created after lapse of 6 months resulting from multiple SRR cuts and government making the long delayed payments providing the ability for CBSL to discontinue daily reverse repo auctions and term reverse repo auctions.

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.