ICRA Lanka’s projections show that the economic growth is recording better performance in 3Q and 4Q.
It expects that the CBSL would maintain an accommodative monetary policy and therefore current low interest rate climate to continue throughout 2H 2020.
“It is less likely that we see an appreciable expansion in credit as the recessionary currents flow strong at the moment. In addition, fall in aggregate demand may lengthen the current deflationary environment. From the point of view of strengthening of reserves, the GoSL is likely to meet foreign currency obligations by rolling over some of these debts or through bilateral agreements being negotiated or in place currently.”
However, the bigger challenge would be in meeting the obligation of the USD 1 billion ISBs maturing in October. Wage growth will continue to trend down in accordance with higher unemployment levels expected by the year end.
Going by the forward rates, the rupee could depreciate close to Rs 187/USD by the end of the year with strong probability of falling further if the imports pick up. Financial institutions will continue to lend to safer and less risky market and customer segments.
Interest rates in both the wholesale and retail lending markets declined due to the extraordinary monetary easing by the CBSL. As a result of the CBSL’s COVID response, excess liquidity level shot up to unprecedented levels but the risk appetite of the financial institutions remained subdued, as seen by the contraction in private credit.
Import controls, export recovery, and the CBSL’s intervention in the forex market helped to stabilize the reeling rupee. The reserves shrunk by 16% in comparison to pre-crisis level as a result of the CBSL’s forex market intervention and payments for foreign currency obligations.
ICRA Lanka’s view, recovery of the financial sector will be largely contingent on the recovery of certain key segments of the economy, such as construction, tourism, and the SMEs. Moreover, a stable policy framework and recovery strategy is paramount for the overall stability of the economy.
Essential sectors and utilities such as pharma, healthcare, power, energy, and telecom had the least impact on their valuations. Export oriented sectors such as textile and manufacturing had moderate impact, but plantations, which comprised mostly tea exporters had a fairly good run during the 2Q due to rise in global tea prices.
Due to restrictions in mobility and social distancing, sectors such as construction, real estate, leisure and services were also moderately affected. Import dependent sectors such as trading and motor vehicles and financial sector equities such as banks finance & leasing and investment funds were the hardest hit.
0 comments: