With the current pandemic situation showing no sign of dissipation, ICRA Lanka says they do not expect businesses to operate with their potential or near potential capacity. The impact will be felt more in the services sector than in the industrial sector.
“Fuel price hike and its spillover effect will force inflation rate up. This will keep pressure on the treasury yields in the near term. As a consequence of subdued economic activity level, the credit growth may not be able to maintain momentum in June.” High oil and base metal prices combined with falling tea prices will further compound the external sector challenges.
“We expect the USD 1 billion ISBs maturing in July to be serviced out of the reserves which will put pressure on the reserve position of the country.”
Global Brent crude oil prices continued to increase throughout the month of May as it ended at a two-year high of over USD 69 a barrel. The rise in prices continued to be driven by robust demand stemming from US and European markets as a result of the success of vaccine programmes.
The daily global demand is expected to reach 100 million barrels in the third quarter, and OPEC+ counties are expected to raise production to meet the demand. Proceeds from the April SLDB auction was used to settle the maturing USD 694 million tranche in May. This brought the overall reserves back almost on par with March levels (USD 4 billion).
The Rupee was hovering around 200 LKR/USD and broadly stable during the month. The CSE remained somewhat upbeat throughout the month of May as the share market closed with a 2.7% and 3.82% gain in the ASPI and S&P 20 respectively. Foreign investors continued to be net sellers, and overall net foreign outflow increased marginally to Rs 3.8 billion (USD 19 million). Most of the GICS sectors were able to make gains and the best performing sectors were Healthcare and Diversified Financials. Overall PBV (Price-to-Book-Value) increased from 1.12 to 1.14 favoring sellers.
Meanwhile, rubber prices reached a one-year peak in the month of May due to supply constraints stemming from surging COVID cases and the resulting lockdown procedures in South Asian countries. Furthermore, increasing demand coming from improved industrial activity in other regions have also contributed to the price hikes.
Global tea prices crashed in May despite relatively healthy supply levels unhampered by the lockdowns in South Asian source markets. PMI for manufacturing and services further deteriorated on account of resurgence of COVID-19 cases across the island recording the lowest index values since October last year. Headline inflation rose to 4.5%, the highest since April last year.
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