Foreign investors continue to exit from government securities market, stocks over rocky politics

• Total foreign outflow form G-Sec market so far this year tops Rs.10bn; Rs.860mn from stocks
• In 2018, G-Sec market lost Rs.160bn and net outflow from CSE stood at Rs.22.8bn 

Sri Lanka may have sorted out its political gridlock for the moment, which hurt the investor sentiments the most, paralysing the country’s administration and economy but the effects that it left appear to linger on for some time.

The exit of foreigners from government securities and equities markets have continued unabated in the new year, the data released by the Central Bank and Colombo Stock Exchange showed. 

The foreigners have sold net Rs.3.6 billion during the week ended January 11, 2019 from the government securities market while the stock market saw a net outflow of Rs.753 million during the same period, bringing the total outflow for the year so far up to Rs.10.3 billion and Rs.860 million, respectively.
During 2018, Sri Lanka’s government securities market lost Rs.160 billion while the Colombo Stock Exchange saw a Rs.22.8 billion net outflow.     
The rise in the US treasury yields on the back of a strong US economy sparked foreign bond sell offs in the emerging and frontier markets as foreign investors sought less risky assets to park their funds. 

The pace of such outflows increased since October 26 when President Maithripala Sirisena triggered a constitutional crisis during which all three global rating agencies cut Sri Lanka’s sovereign rating due to heightened refinancing risks amid political uncertainty.  

Foreign holding in government securities have more than halved from a year ago to Rs.154.2 billion by January 11, 2019.     

The pressure adds to the currency, which fell in value by 19.56 percent in 2018 and the reserves lost US $ 1.12 billion in defence of the rupee.  
Sri Lanka ended the year with gross official reserves of US $ 6.9 billion.      

In contrast, in 2017, Sri Lanka purchased US $ 1.165 billion to strengthen the reserves and the rupee depreciation was a modest 
2.04 percent.  

So far in 2019, the Sri Lankan rupee has appreciated by 0.3 percent against the US dollar. 

The Central Bank recently said it intends to cut the volume of rupees the foreigners can hold from the existing 10 percent to 5.0 percent in a bid to reduce the foreign exchange volatility.

 
“In view of the increased volatility in global financial markets, we intend to reduce the threshold for foreign investment in rupee-denominated government securities from 10 percent to 5 percent,” said Central Bank Governor Dr. Indrajit Coomaraswamy unveiling the monetary policy framework for 2019 and beyond.