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Sri Lanka risks dipping in economic freedom index

Sri Lanka’s economic freedom has been threatened by the arbitrary actions taken by president Maithripala Sirisena when he decided to remove the democratically elected Prime Minister Ranil Wickremesinghe and Cabinet of Ministers and replacing them with former strongman Mahinda Rajapaksa and his allies. 

As result of this act, the country’s public sector services came to a standstill with the bureaucracy adopting a wait and see attitude without carrying out directives issued by the president, new prime minister and his cabinet of ministers. 

The country‘s public machinery came to a grinding halt for more than one month following current political impasse instigated by the president, official sources confirmed.

Under this set up, president Sirisena has advised all Ministry Secretaries today (04) to continue all public services without any delays and interruptions according to the existing law. 

Amidst this economic turmoil, Sri Lanka’s economic freedom index for 2018 has pushed the country to the 111th position out of 186 countries. 

The Index published by The Heritage Foundation, Washington's No. 1 think tank covers 12 freedoms – from property rights to financial freedom – in 186 countries. Sri Lanka’s economic freedom score is 57.8, making its economy the 111th freest according to the 2018 index. Its overall score has increased by 0.4 points, with improvements in investment freedom, business freedom, and judicial effectiveness outweighing a lower score for fiscal health. Sri Lanka is ranked 25th among 43 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

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Sri Lanka raises key interest rate to stave off inflation

With the aim of stabilizing Sri Lanka’s inflation at mid single digit level, the Central Bank has raised its policy rate on Wednesday (14), after one and half years.

In order to neutralise the impact of this reduction and maintain its neutral monetary policy stance, the Monetary Board of the Central Bank has decided to increase the Standing Deposit Facility Rate (SDFR) of the Central Bank by 75 basis points to 8.00 per cent and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points to 9.00 per cent, Central Bank announced.  

The Monetary Board, at its meeting held today, decided to reduce the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of commercial banks by 1.50 percentage points to 6.00 per cent.The Board arrived at this decision following a careful analysis of current and expected developments in the domestic and global economy and the domestic financial market, with the broad aim of stabilising inflation at mid single digit levels in the medium term to enable the economy to reach its potential.

Tight monetary conditions persisted in the domestic market and the large and persistent shortage in rupee liquidity required the Central Bank to conduct open market operations (OMOs) on a short- and long-term basis in addition to overnight operations.The significant growth in imports as well as recent capital outflows amidst the broad based strengthening of the US dollar exerted pressure on the exchange rate.

Although the pace of depreciation has moderated recently, the Sri Lankan rupee has depreciated by 12.9 per cent against the US dollar during 2018 up to 13 November.Meanwhile, supported by the receipt of the foreign currency term financing facility of US dollars 1 billion by the government, gross official reserves amounted to US dollars 7.9 billion as at end October 2018, providing an import cover of 4.2 months

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Fitch downgrades Sri Lanka due to continuing political crisis

Fitch has downgraded Sri Lanka’s long-term debt rating as the country grapples with the ongoing political turmoil.

The ratings agency on Tuesday said it had downgraded Sri Lanka's long-term foreign-currency issuer default rating to B from B+.

The move reflected “heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation as a result of an ongoing political crisis” following president Maithripala Sirisena’s sudden replacement of prime minister Ranil Wickremesinghe in late October, Fitch said in a statement.

“Fitch believes the ongoing political upheaval, which has disrupted the normal functioning of parliament, exacerbates the country's external financing risks, already challenged by the tightening of global monetary conditions amid a heavy external debt repayment schedule between 2019 and 2022.”

Analysts have warned about Sri Lanka’s weak fiscal position and urgent refinancing needs amid low foreign exchange reserves and high near-term debt obligations – including to China.

While authorities plan to raise cash through bilateral and commercial borrowing and foreign-currency swaps, risks “could arise from a prolonged period of political uncertainty accompanied by an adverse shift in investor sentiment”, Fitch said.

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Sri Lanka rupee hits record low of 176.05 on political crisis

The Sri Lankan rupee fell to a record low on Tuesday, as political uncertainty triggered by President Maithripala Sirisena's decision to sack parliament weighed on sentiment, market participants said.

The currency hit 176.05 versus the dollar, surpassing its previous all-time low of 175.90 hit on Monday.

Sirisena dissolved parliament on Friday night and called a general election for Jan. 5, drawing international criticism, in a move likely to deepen the country's political crisis.

"Exporters are not converting dollars and there is a lack of liquidity in the market," one trader told Reuters, asking not to be identified.
The rupee closed at 175.60/75 per dollar on Monday and has fallen 14.6 percent so far this year, Refinitiv Eikon data showed. (Reuters)

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Export earnings surpass USD 1 Billion for the fourth consecutive month

Sri Lanka’s export earnings have surpassed USD 1 billion for the fourth consecutive month, latest data from the Central Bank showed.

However, a higher growth in import expenditure has outpaced the increase recorded in export earnings.

The latest Central Bank’s External Sector Performance data highlights that the widening deficit in the trade account and the strengthening of the US dollar, which resulted in outflows of portfolio investments, adversely impacted the balance of payments during the month. In the financial account, foreign investments in the government securities market recorded outflows responding to the firming up of global financial markets. 

Meanwhile, the Colombo Stock Exchange (CSE) also witnessed some outflows of foreign investments during September. Consequently, the Sri Lankan rupee which depreciated against the US dollar by 5.3 per cent in the first eight months of the year, showed a further depreciation of 4.6 per cent in September, reflecting the pressure on the domestic foreign exchange market. 

These developments necessitated intervention by the Central Bank to curtail excessive volatility in the exchange rate. The country’s gross official foreign reserves stood at USD 7.2 billion at the end of September 2018 which was equivalent to 3.8 months of imports.

Earnings from industrial exports, which account for 77 percent of the total export earnings, grew by 9.4 percent during September 2018, while earnings from agricultural exports fell by 10.8 percent, reflecting the poor performance in almost all categories except seafood. 

Industrial export earnings from textiles and garments increased in September 2018 reflecting considerable high demand for garments from the USA and non-traditional markets such as Canada, India and Japan although a slight reduction was recorded in exports to the EU market. 

Earnings from petroleum products increased substantially in September 2018 due to higher export prices of bunker and aviation fuel, despite low export volumes. Export earnings from leather, travel goods and footwear, and base metals and articles increased in September 2018 contributing towards the increase in industrial exports.

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Sri Lanka dollar bonds drop more than 2 cents as political crisis deepens

Sri Lanka’s dollar-denominated bonds tumbled on today (11) after President Maithripala Sirisena dissolved parliament on Friday night and called a general election for Jan. 5 in a move that will likely deepen the country’s political crisis.

The 2020 issue fell as much as 2.7 cents to 94.98 cents, its lowest level since at least January 2017 with bid yields soaring to record levels of more than 9 percent, according to Refinitiv Eikon data.

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Moody's downgrades ratings of BOC, HNB & Sampath Bank due to political crisis 

Moody's Investors Service has downgraded the long-term local currency deposit and foreign currency issuer ratings of Bank of Ceylon (BOC), Hatton National Bank Ltd. (HNB) and Sampath Bank PLC (Sampath) to B2 from B1.

At the same time, Moody's has downgraded the long-term foreign currency deposit ratings of the same three banks to B3 from B2.

Moody's has affirmed the short-term local and foreign currency deposit ratings of the banks at NP.

They have also downgraded the Baseline Credit Assessments (BCAs) and adjusted BCAs of the three banks to b2 from b1.
As a result, Moody's has downgraded the banks' long-term local and foreign currency Counterparty Risk Ratings (CRRs) to B1 from Ba3, and their long-term Counterparty Risk Assessments (CRAs) to B1(cr) from Ba3(cr).

The rating actions follow the downgrade of Sri Lanka's sovereign rating to B2 from B1 on 20 November 2018, and the change in the sovereign's rating outlook to stable from negative on the same date. To reflect the deterioration in the operating environment, Moody's has also lowered Sri Lanka's Macro Profile to "Weak" from "Weak+". The rating action on Sri Lanka's sovereign rating is discussed in greater detail in Moody's press release dated 20 November 2018:

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Sri Lankan stock market records heavy foreign outflow: Investors pullout LKR 3.2 billion in a day

The Sri Lankan rupee ended weaker on Monday as outflows from stocks and government securities due to political uncertainty raised dollar demand. 

Over LKR 3.2 billion of foreign sales were recorded just today(05).

Finance Minister Mangala Samaraweera in a tweet said that in the 6 days of trading under the Maithri-Mahinda regime, "the net outflow has been a staggering LKR 7 billion - topping the net foreign outflow for the entire year before the 26th of October 2018."

stock market

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CBSL conducts technical session on 'forging ahead with resilience' for bank directors

The Central Bank of Sri Lanka with a view to ensuring a stronger and dynamic banking sector which is capable of proactively facing challenges in digital era, hosted a Technical Session to further enhance and update the knowledge of Boards of Directors, Chief Executive Officers and other Key Management Personnel of all licensed banks operating in Sri Lanka, under the theme “Forging Ahead with Resilience”, on 14 November 2018 at the Centre for Banking Studies, Rajagiriya.

The Governor of the Central Bank of Sri Lanka delivered the opening remarks, giving an overview on the state of the economy and the rationale for the recent monetary policy stance of the Central Bank of Sri Lanka. The Governor highlighted the measures taken to strengthen the regulatory framework for banks in terms of capital requirements, technology risk management and governance. The Governor further indicated that with the emergence of fintech and advanced technologies like blockchain, the business models of banks may change significantly over time while opening up new business opportunities. 

However, adoption of these new technologies need to be encouraged while ensuring the safety and soundness of the banking system. The Director of Bank Supervision presented the banking sector performance and the regulatory developments, highlighting the proposed measures to strengthen the enforcement powers, enhanced capital requirements for banks, implementation of the Basel III framework and prudent adoption of SLFRS 9.

The Technical session was enriched with insightful experiences of the three eminent resource persons on timely topics such as the culture and conduct of future Boards, technology risk resilience of banks and anti-money laundering compliance challenges in the digital era. Mr. Carl Hollingsworth, Regional Head, Subsidiary Governance, ASEAN & South Asia, Greater China and North Asia, Standard Chartered Bank, elaborated on the culture and embedding conduct of boards and new skill requirements for the future board of directors. Mr. Bryan MacKinnon, Asia Pacific Regional Head for Business Continuity Management and Technology Risk Management, Citibank, N. A. enhanced the knowledge of the bank directors on technology risk management and cyber security measures that need to be put in place to ensure technology risk resilience. Mr. Kevin Whelan, Resident Adviser, U.S. Department of the Treasury Office of Technical Assistance, highlighted the challenges/opportunities for regulators and banks with the development of FinTech and the anti-money laundering challenges faced by banks in the digital banking landscape.

The Technical Session was attended by over 200 participants including Chairpersons and Directors of locally incorporated banks, regional representatives overseeing the foreign banks operating in Sri Lanka, Chief Executive Officers, Chief Operating Officers, Chief Risk Officers and Compliance Officers of all licensed banks and senior officials of the Central Bank of Sri Lanka.

The Central Bank of Sri Lanka considers it imperative to ensure that the Directors and the Key Management Personnel of licensed banks keep abreast of the developments in financial technology, new risks emerging from such technologies and regulatory developments relating to the financial sector. Accordingly, the Central Bank conducted this technical session to enhance the knowledge of bank Directors and to further strengthen the interaction with the Boards of Directors and the Key Management Personnel of licensed banks. This session was conducted by the Central Bank in addition to its periodic meetings with Chairpersons and Chief Executive Officers of licensed banks and envisages to continue such dialogues in the interest of the stability of the banking sector.

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Sri Lanka’s import cost outweighs export earnings

Sri Lanka’s export earnings grew by 5.8 per cent (year-on-year) to USD 7,842 million during the first eight months this year while imports increased by 10.9 percent, Central Bank’s weekly economic review revealed.  

This was a result of higher earnings from exports of textiles and garments, petroleum and rubber products, machinery and mechanical appliances food, beverages and tobacco and base metals. 

Import expenditure stood at USD 15,083 million during the first eight months of 2018 increased by 10.9 per cent (year-on-year). 

Imports of fuel ,personal vehicles and textiles have contributed to higher export expenditure.   

As a result, the deficit in the trade account expanded to USD 7,240 million during the first eight months this year from USD 6,184 million in the corresponding period of 2017. 

The export unit value index increased by 0.4 per cent (year-on-year) in August 2018 mainly due to high prices registered in industrial exports. 

The import unit value index in August 2018 increased by 2.0 per cent (year-on-year) due to high prices recorded in intermediate goods and consumer goods imports. 

Accordingly, the terms of trade deteriorated by 1.5 per cent (year-on-year) to 102.7 index points in August 2018.

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Sri Lanka's service sector records a higher growth: CBSL

Despite the prevailing political uncertainty, Sri Lanka's service sector grew at a higher pace in October, underpinned by a strong upturn in business activities and new businesses, the Central Bank announced. 

The expansion in business activities was seen mainly across financial services, transportation and warehousing sub sectors. However, respondents of the Central Bank survey cited that the depreciation of the local currency had an adverse impact on import volumes and thereby on their activity growth. 

New businesses also expanded across financial services and professional services sub sectors. Employment levels grew at a higher rate in October owing to the expansion in business activities. 

Service providers have expressed optimism on the three months business outlook strengthened in October 2018 due to upcoming festive season and the peak season for tourism. 

However, respondents raised concerns over the current political situation and the weakening of the domestic currency which could moderate the realisation of expectations. 

Prices charged by the service sector increased at a higher rate while the expected labour cost in the service sector also increased during October due to bonus payments

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Bond Buyers Scorched as Sri Lanka's Promise Turns to Crisis

When Sri Lanka offered 10-year bonds at a juicy yield of 6.75 percent earlier this year, investors lapped them up. Lured by expectations for an economic recovery, asset managers put in orders for nearly three times the $1.25 billion sold.

Six months later, the bonds have slumped to less than 87 cents on the dollar, as a leadership struggle plunged Sri Lanka into a constitutional crisis. The capital Colombo has been gripped by political intrigue since President Maithripala Sirisena suspended parliament and said he had to fire Prime Minister Ranil Wickremesinghe because of an assassination plot.

While Sri Lanka had been winning back investors following the end of a brutal 26-year civil war in 2009, new challenges had emerged even before the crisis, with economic growth falling to the least since 2001 last year. The sell-off is also fueling concerns over Sri Lanka’s upcoming debt maturities, including $1 billion of dollar bonds due January and another $500 million in April.

“The timing of this political crisis is very poor” said Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments, which is “underweight” on the nation’s debt. “Sri Lanka clearly needs some external financing.”

There is a “significant risk” as one administration transitions to another and investors will demand a risk premium, especially if the rhetoric is not market-friendly, Lau said.

The Sri Lankan rupee fell further on Tuesday to a record low of 174.45 against the dollar, following a warning the country could descend into political violence if the legislature remains suspended.

Wider SpreadsHowever, Aberdeen Standard Investments said the declines in the Sri Lankan bonds meant they were arguably no longer expensive as spreads had moved wider than Pakistan, Mongolia and almost all of sub-Saharan Africa.

“We are having an active debate on whether it’s worth covering at least some of our long-standing underweight of the credit,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard.

Others flagged concerns in the wake of the political crisis. It calls into question whether the International Monetary Fund will grant Sri Lanka an extension of its current assistance program, said Karan Talwar, an investment specialist for emerging-market debt at BNP Paribas Asset Management in Hong Kong.

“We have been generally cautious on Sri Lanka” due to its high levels of dollar debt, current-account deficit and depreciating currency, he said.

Almost half of the country’s public debt is in foreign currencies, according to Fitch Ratings.


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